The dollar is languishing at its lowest level in three years

Image: Reuters/Jonathan Ernst
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Things have gone from bad to worse for the US dollar. After recording its first annual decline in five years in 2017, an index of the US currency versus America’s largest trading partners has now dropped to its lowest level in three years.

The ICE dollar index, which measures the dollar against a basket of six other currencies, fell nearly 10% in 2017, the biggest annual decline since 2003. At the start of 2018, it was pushed even lower by gains in the euro, which makes up more than 50% of the weight of the dollar index.

The euro climbed to $1.22 in trading today, the highest since late 2014, after a breakthrough in German coalition talks last week looked set to bring about an EU-friendly government led by Chancellor Angela Merkel. Meanwhile, the strength of the euro-zone economy has raised expectations that the European Central Bank will further pare back its monetary stimulus, which normally depreciates a currency.

Even as US companies performed well last year—evidenced by the record-breaking stock market—and the economy grew at a healthy pace, the dollar hasn’t been able to withstand competition from other currencies, where faster-than-expected economic growth and the withdrawal of central bank stimulus has attracted investors.

Steven Barrow, the head of G-10 strategy at Standard Bank, said he expects the decline of the dollar to continue for several more years. In part, this will be because of other central banks catching up to the policy tightening of the Federal Reserve. Also, in the long term, the Trump administration’s “America First” policy, which favors deglobalization, could result in a smaller role for the dollar in the global economy. Today, the German central bank said it had decided to include the Chinese yuan in its foreign exchange reserves, after the European Central Bank said last year that it has exchanged €500 million worth of its US dollar reserves into yuan.

“We believe that the ‘America first’ policy and the drive to make the US more competitive against other major trading partners is consistent with, at best, benign neglect of the dollar and, at worst, a clear desire for dollar weakness,” Barrow wrote in a note to clients.

This morning, analysts at Commerzbank summed it up in a note to clients that adopted another Trump saying: “Sh**hole Dollar.”