Dollar is poised to weaken just in time

The days of a strong dollar look as if they’re coming to an end — and not a moment too soon. If the dollar does weaken, we may finally see the kind of durable and robust growth that the US has only had in fits and starts since the financial crisis ended.
Let’s tick off a few of the events that should figure in a weakening dollar: The Federal Reserve has given indications that it will wait for a truly hot labor market before raising rates; the resounding election victory of conservatives in the UK gives clarity on Brexit, leading to a stronger pound; and the US and China may be getting closer to putting together terms for a trade deal.
The dollar’s surge began in July 2014, seven months after the Fed started winding down the quantitative easing program it used to battle the Great Recession. That shift changed the focus of market participants to when the Fed would begin increasing the fed funds rate from roughly zero, where it had sat since the financial crisis. At its June 2014 meeting, the Fed’s dot plot showed that members of the Federal Open Market Committee projected that the central bank would raise interest rates three or four times in 2015.
Anticipation of tighter monetary policy when the rest of the world’s economies were still weak, with their central banks holding interest rates near zero and steady, led to a 25% rally in the dollar in the next 18 months. Coinciding with that rise was a collapse in the price of commodities such as oil, economic turmoil in emerging markets and a slump in global manufacturing.
The global recovery that began in early 2016 started to reverse the dollar’s gains. But the approval in the UK of the referendum to leave the European Union that June led to a significant decline the British pound, creating fresh demand for the dollar as a safe haven. Meanwhile, starting in 2015 and continuing through late 2018, the Fed raised interest rates from a little more than zero to 2.5%, making US assets more desirable and increasing demand for dollars to invest in them. And then in 2017 President Donald Trump embarked on a trade war with China, leading to a new round of dollar strengthening and slowing inflation.
If the dynamics buoying the dollar during the past five years have been overly hawkish monetary policy, Brexit uncertainty and the repercussions of the trade war, then it now look as if we’re in a new environment where the dollar may finally move lower.
And that could be the impetus that pushes the global economy into higher gear in 2020.
Large moves in the dollar have multiplying effects. A strong dollar tends to push down commodity prices, weaken growth in emerging markets, create disinflation in the US and make American workers and industries less competitive in the global market. A weak dollar does the opposite. A rebound in commodity prices could contribute to a new cycle of global investment.

—Bloomberg