Why the US Dollar Is Weakening
Audio version available here (2 min.)
Amid several global and domestic factors, the United States has seen the dollar become weaker in recent times after a long period of growth. Here’s why, and how it could affect your business.
1. Interest Rate Expectations: With the Federal Reserve hinting at interest rate cuts after years of unprecedented high rates, it opens the possibility of the dollar weakening. Periods of high interest rates usually attract foreign investment, which boosts the dollar. The opposite happens when rates are expected to fall.
2. Economic Slowdown Concerns: Despite the US economy’s resiliency in a post-pandemic world, it may finally be time for it to slow down. Manufacturing and labor markets have faced a recent downturn. In turn, the rest of the economy slows down as investors seek higher returns elsewhere. This then contributes to a weaker currency.
3. Global Currency Dynamics: The dollar's strength can also be influenced by other major currencies’ relative strength. For example, if a major economy like the Eurozone shows stronger economic performance, or their central banks raise rates, the euro could strengthen against the dollar.
4. Trade Deficit: The US is currently importing more than it exports, which runs as a significant trade deficit. In the long-term, this structural issue puts downward pressure on the dollar. This is due to more dollars flowing out of the country than coming in from exports.
5. Political Uncertainty: As the nation gets closer to a major election, concerns about fiscal policy and government spending can weigh on the dollar. The fiscal deficit has been growing, standing at $1.52 trillion for 2024. Worries about the long-term effects of the deficit and total national debt further erode confidence in the dollar.
6. Diversification of Reserves: Around the world, some central banks are diversifying their foreign exchange reserves away from the dollar into other currencies or assets like gold. This weakens the dollar by shifting demand away from it.
Why should you care as a business owner? If the dollar weakens, then your customers will have less spending power. As consumers grow more frugal, that’s revenue your business could lose. While business owners cannot control the dollar’s strength, they can control how their business reacts. For personalized guidance on how you can protect your business in a weakening economy, reach out to our expert accountants at XQ CPA.
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