U.S. 100 dollar banknotes are arranged for a photograph in Tokyo, Japan. Photographer: Tomohiro ... [+]
The recent tumble in the value of the dollar is just the beginning of a far greater plunge that is about to materialize, analysts say.
That will likely put further stresses on an already beleaguered economy and could make re-election for the Trump administration harder.
“Our FX [foreign exchange] strategists believe that the recent decline in the USD is just the beginning of a larger structural downtrend in the greenback driven, in part, by a further recovery in the global economy,” states a recent report from iconic Wall Street bank Goldman Sachs GSBD .
The statement comes after an already severe decline in the dollar index, which started three months ago. The dollar index was recently trading at around 97 down more than 5% from 102.8 on March 20, according to data from Bloomberg.
However, that drop, which was relatively swift and significant, may be only the beginning of a larger tumble in the value of the greenback, the report states.
“They [the Goldman analysts] estimate that the USD may fall more than 20% from its recent peak,” the report state. That means it could drop to 84, a level it hasn’t seen in the last five years.
Why should investors care? In the first place, a weaker dollar tends to make the economy grow slower than it otherwise would. The reason is that when a currency is declining or at least isn’t stable investors tend to invest their money elsewhere.
Falling Dollar Could Sour the Election for Trump
Another problem with the value of the dollar falling is that it is by definition inflationary. If one dollar buys less today than it did yesterday, then you have inflation. It will mean gasoline prices, and food prices will likely see increases and at a time when wages will likely be stagnant and unemployment high.
People tend to vote out incumbents when they find that the combined percentage unemployment rate and percentage inflation rate rise over the four years since the last election.
Good News for Some Companies
There is some good news for corporate America. The falling dollar will make the goods and services of some companies more competitive on the global market. That’s especially true of firms “deriving a large share of their revenues overseas,” the Goldman report states. That would also be true for companies selling products priced in dollars, such as oil or gold.
That should mean energy stocks such as those held in the Energy Select Sector SPDR Fund (XLE) exchange-traded fund, which holds energy stocks and the VanEck Vectors Gold Miners ETF (GDX), which holds gold miners, should do better than average.
