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- The US dollar's recent decline is a bullish signal for global markets, DataTrek reports.
- Since its September peak, the US Dollar Index has fallen by 11.3%.
- "This is one of those developments that, at first, may seem counterintuitive to dollar-based investors."
The dollar's recent slide is good news for global markets as it signals that investors may be starting to shed safe havens, according to DataTrek.
And the greenback — as measured by the Nominal Broad US Dollar Index — is poised to continue falling toward its long-term average of 115, which 3.8% below current levels, Nicholas Colas, co-founder of DataTrek Research, said in a note.
"A weaker dollar at this point in the global economic cycle is both consistent with the past and a generally bullish sign about the future," he wrote. "This is one of those developments that, at first, may seem counterintuitive to dollar-based investors. It is, however, how markets signal better times to come."
A weaker dollar is positive for both non-US equities and US tech stocks, which is the only S&P 500 sector with substantially more than half its revenues from non-dollar sources, Colas added.
Historically, the US Dollar Index, which compares the greenback's strength to a basket of currencies, spikes in moments of economic crises, such as in 2009 and 2022. But history has shown that once the turmoil passes, the dollar will weaken and growth will resume.
In 2022, the index climbed 7.9% as the Federal Reserve hiked rates aggressively to fight inflation. It has since fallen 11.3% from its September peak.
Over the next 18 months, the dollar could continue to slide by 10% to 15%, according to an earlier Eurizon SLJ Capital note. That's as cooling inflation could prompt the Federal Reserve's first interest rate cut since embarking on its tightening cycle last year.
However, Goldman Sachs has previously found that exchange rate changes have an inverse effect on inflation. As the dollar weakens, consumers may find that higher prices stick around for longer.