After standing strong as a haven of value amid the unfolding economic crisis last spring, the U.S. dollar has lost about 12 percent of its value against a benchmark collection of other currencies.
A key reason: U.S. interest rates were around 2 percent before the current economic crisis, placing them comfortably above those of most other nations. However, the U.S. Federal Reserve has now cut interest rates to near zero and pledged to hold them there for at least another year and probably through 2022, eradicating the lure of yields higher than those available from other countries.
U.S. interest rates remain higher than Japan’s 0.02 percent or Germany’s 0.58 percent.
However, as quoted by analyst Aaron Back in the Wall Street Journal, real U.S. yields are lower than their nominal rates, according to Simona Gamborini at Capital Economics.
In November 2020, the consumer price index was 1.6 percent above that of a year earlier. At the same time, Japan and Europe were seeing deflation, in which consumer price indices fall.
The Fed also has announced a policy to let inflation rise above 2 percent and not to raise rates as the jobs market improves.
Also, deficit spending means more borrowing, which will have a negative impact on the dollar, as will the Fed’s guarantee of long-term low-interest rates.
