This sharp fall is primarily driven by growing expectations of interest rate cuts by the US Federal Reserve and increasing global economic uncertainty.
The dollar also weakened significantly against the Japanese yen and euro, falling 4.7% and 4.5%, respectively, according to CNBC Aawaaz.
Why is the dollar declining?
Several factors are contributing to the dollar’s weakness. Goldman Sachs has raised its recession probability in the US from 20% to 35%, signalling increased economic risks.
Also, concerns over potential reciprocal tariffs and trade instability are adding pressure to the US economy. Analysts expect both the Federal Reserve and the European Central Bank (ECB) to implement three rate cuts each in 2025, further leading to a weakened dollar.
Gold gains as dollar struggles
As the dollar declines, gold prices have surged to record highs. This reflects a shift in investor preference towards safe haven assets, as gold and the US dollar typically move in opposite directions.
The growing uncertainty in global markets is pushing investors to seek stability in assets like gold.
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Trump tariffs
A major factor affecting the currency markets is US President Donald Trump’s announcement of impending “reciprocal” tariffs on almost all trading partners. Trump has not provided specific details yet, keeping investors on edge, as per Reuters.
European Commission President Ursula von der Leyen has indicated that while the EU is open to negotiations, it will retaliate strongly if necessary. Analysts expect some measures, including a 25% tariff on food and pharmaceutical imports, but believe that a portion of the announced tariffs may not be implemented immediately.
Implications for India
The dollar’s decline presents several economic advantages for India:
Lower import costs: India imports significant quantities of crude oil, natural gas, and electronics in US dollars. A weaker dollar reduces the cost of these imports, potentially leading to lower fuel and essential commodity prices.
Controlled inflation: Cheaper imports help ease inflationary pressure, making essential goods more affordable.
Increase in foreign investments: A weaker dollar often leads to higher foreign investments in emerging markets like India, boosting the stock market and strengthening the rupee.
Lower external debt burden: India’s external debt, largely denominated in US dollars, becomes easier to manage when the currency weakens, reducing repayment costs.
Reduced pressure on RBI: A weaker dollar eases the Reserve Bank of India’s (RBI) needs to intervene in currency markets, stabilising foreign exchange reserves.
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Potential risks and future outlook
While a weaker dollar benefits imports and inflation, it could negatively impact exports. A stronger rupee makes Indian goods more expensive in global markets, potentially reducing demand for Indian goods.
Moreover, if currency fluctuations remain uncertain, these require careful economic planning.
Markets are closely watching the Federal Reserve’s next moves, as further policy shifts could drive even more currency volatility. Trade tensions, especially the impact of Trump’s proposed tariffs, will also play a crucial role in shaping global financial trends.
(With inputs from media reports)
