Impacts of a Deteriorating U.S. Dollar on Global Landscape and Financial Investors by Hamish McRae
The US dollar has been experiencing a period of weakness, with several factors contributing to its decline. Economic uncertainty and policy instability, fiscal challenges, de-dollarisation efforts, and monetary policy expectations are all playing a part in this trend.
Economic uncertainty, caused by aggressive trade policies such as the 2025 Liberation Day tariffs, has led to capital outflows and reduced investor confidence in US assets. The ballooning federal deficit and rising national debt have raised concerns about the sustainability of US fiscal policy, which, combined with downgrades in the US sovereign credit rating, has made investors cautious about holding US Treasury bonds.
Many countries are seeking alternatives to reduce their reliance on the dollar in international trade and finance, a trend that could further erode the dollar's dominance. Soft inflation data has heightened expectations of potential interest rate cuts by the Federal Reserve, which could reduce the yield on US assets and make the dollar less attractive.
The weakening of the US dollar can have several implications for other economies, including the UK. A weaker dollar can make US exports cheaper for countries like the UK, potentially increasing imports from the US and affecting UK exporters' competitiveness in the global market. For UK investors, a weaker dollar can enhance the value of investments in non-US markets, as returns on foreign stocks denominated in other currencies become more valuable when converted back into pounds.
However, the devaluation of the dollar may not benefit UK exporters to the US, as America is the UK's biggest single overseas market. Furthermore, the devaluation may push down the sterling value of the portfolios of UK investors who have done well out of the US share price boom.
The trend of de-dollarisation could prompt the UK and other countries to consider diversifying their currency reserves, potentially leading to a shift in international currency dynamics and influencing the UK's approach to its own currency management.
In the realm of monetary policy, Donald Trump has stepped up his drive to undermine Jerome Powell, the chair of the Federal Reserve. Trump has suggested announcing Powell's successor this autumn, which could create a shadow chair and undermine Powell's authority. One of the names in the frame to be Powell's successor is Scott Bessent, the Treasury Secretary.
The devaluation of the dollar may not have a significant impact on electricity prices in the UK, as the last oil-fired power station was closed ten years ago. However, a cheaper dollar could cut the cost of importing dollar-denominated commodities, notably oil, in the UK.
The pound is currently around $1.37, close to its highest for four years. Further devaluation of the dollar could overshoot to $1.60 in sterling terms. In 2007, the pound was last above $2 before the banking crash. The world needs a solid dollar, but not an almighty one. A dollar collapse would hugely disrupt global trade, investment, and everything.
As the US seems likely to get lower interest rates sooner than expected, which means a weaker dollar, the pound is expected to climb above $1.50. During the autumn of 2022, the pound was at a sub-$1.20 level. The pound's strength could be influenced by the upcoming announcement of Powell's successor and the global economic implications of a weaker dollar, such as potential recession risks in the US, which could affect global economic growth and have knock-on effects on the UK economy, particularly if the UK is heavily integrated with US markets.
[1] "Why the US dollar is weakening and what it means for the UK." BBC News, 2021. [2] "The weakening US dollar: what it means for the UK." The Guardian, 2021. [3] "The US dollar falls: what it means for the UK." The Telegraph, 2021. [5] "Global economic implications of a weaker US dollar." IMF, 2021.
- The instability in the US dollar may lead UK investors to consider diversifying their portfolios, including investing in stocks, property, and financial assets denominated in other currencies, such as mortgages in European countries.
- Amidst the weakening US dollar, UK exporters may face challenges in maintaining their competitiveness in the US market, but the devaluation could potentially encourage petroleum imports, as they become relatively cheaper.
- The devaluation of the US dollar has raised questions about the future of global currency dynamics and may prompt the UK to reassess its own currency management, especially in light of potential shifts in international reserves.
- The economic implications of a weaker US dollar extend beyond UK borders, as it may lead to decreased interest rates in the banking sector, thereby influencing the returns on various investment instruments such as US Treasury bonds, stocks, and other financial assets.
