The fall in the US dollar is a boon for risk assets around the world

NEW YORK, July 14 (Reuters) – Cooling US inflation is accelerating the dollar’s decline, and risk assets around the world will benefit.

The dollar is down nearly 13% against a basket of currencies from a two-decade high last year and is at its lowest level in 15 months. Its decline accelerated after the US reported Softer-than-expected inflation data on Wednesday, which supports views that the Federal Reserve is nearing the end of its interest rate hike cycle.

Because the dollar is a lynchpin of the global financial system, a wide range of assets will benefit if it continues to fall.

The weak dollar may be a boon for some US businesses, as a weaker currency makes exports more competitive abroad and makes it cheaper for multinationals to convert foreign earnings back into dollars.

The US technology sector, which includes some of the high-growth companies that have led the markets this year, generates just over 50% of its revenue abroad, an analysis of the Russell 1000 companies by Bespoke Investment Group.

Commodities, which are priced in dollars, become more affordable for foreign buyers when the dollar falls. The S&P/Goldman Sachs Commodity Index (.SPGSCI) it is up 4.6% this month, on pace for its best month since October.

Emerging markets also benefit, as the falling US currency makes dollar-denominated debt easier to service. MSCI International Emerging Markets Currency Index (.MIEM00000CUS) it is up 2.4% this year.

“For the markets, the weaker dollar and its underlying driver, weaker inflation, is a balm for everything, especially assets outside the United States,” said Alvise Marino, a currency strategist at Credit Suisse.

The dollar’s slide came as US Treasury yields fell in recent days, dimming the greenback’s appeal and boosting a wide range of other currencies, from the Japanese yen to the Mexican peso.

“That sound you’re hearing is the breaking of technical levels in the currency markets,” said Karl Schamotta, chief market strategist at Corpay. “The dollar is sinking towards the levels that prevailed before the Fed started to raise, and we are seeing risk-sensitive currencies melt globally.”

A continued decline in the dollar could boost gains from FX strategies such as the dollar-financed carry trade, which involves selling dollars to buy a higher-yielding currency, allowing the investor to pocket the difference.

The falling dollar has already made the strategy profitable this year: an investor selling dollars and buying Colombian pesos would have raised 25% so far this year, while the Polish zloty has returned 13%, according to data from Corpay.

Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, is bearish on the dollar, betting on gains in the Kazakh tenge, Uruguayan peso and Indian rupee.

“When you look at what’s going on right now, the outlook for the dollar is still pretty bleak,” said Upadhyaya, who expects carry trades to thrive if the dollar continues to fall.

In the world of monetary policy, the falling dollar may be a relief for some countries, as it takes away the urgency of supporting their currencies on the downside.

Among them is Japan. The dollar has fallen 3% against the yen this week and is forecast for its biggest weekly drop against the Japanese currency since January. The weakness of the yen has been problematic for Japan’s import-dependent economy, and raised expectations that Japan would again intervene in markets to support its currency after doing so for the first time since 1998 last year.

Traders have also been watching for possible actions by the Swedish central bank given the weakness of the Swedish krona. But this week, the dollar is down nearly 6% against the krona and is poised for its biggest weekly drop since November.

The continued strength of the yen could see investors unwind large bearish positions that have built up against the currency in recent months, sending it higher, said Kenneth Broux, currency strategist at Societe Generale.

Of course, being bearish on the dollar has its own risks. One is a possible pick-up in US inflation, which could stoke bets on a more hawkish Fed line and undo many of the anti-dollar trades that have prospered this year.

Although inflation has cooled, the US economy has remained resilient compared to other countries and few believe the Fed will cut rates any time soon, which could limit the dollar’s decline in the near term.

Still, Helen Given, currency trader at Monex USA, believes the Fed will wrap up its rate-raising cycle before most other central banks, undermining the dollar’s long-term momentum.

While the dollar may pare some of its recent losses, “looking six months from now, the dollar is likely to be even weaker than it is today,” he said.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Dhara Ranasinghe and Ira Iosebashvili; Written by Ira Iosebashvili; Edited by Leslie Adler

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