Dollar continues to fall, what is behind the weakness of the US currency?

This morning, the dollar to the zloty exchange rate reached the lowest level since February 10, 2022. Thus, in total, since the September 2022 peak, the dollar exchange rate has already fallen by more than PLN 1,12, i.e. by more than 22 percent. This is the biggest strengthening of the zloty against the dollar in zloty terms since 2009. At that time, the dollar exchange rate fell from around PLN 3,90 to PLN 2,70. On the other hand, in percentage terms, it is the largest fall in the dollar exchange rate since 2016-2018. At that time, the USD/PLN exchange rate fell from PLN 4,27 to PLN 3,30, which meant a decrease of almost 23%.

What's Behind the Dollar's Weakness?

Although interest rates among developed economies, are in the US at almost the highest level in the world, apart from the UK and additionally another rate hike is expected in Julythe dollar has dropped significantly. Cooling inflation in the US appears to be accelerating the dollar's decline, benefiting risky assets around the world.

The dollar has fallen almost 13% against a basket of currencies since last year's two-decade high is at the lowest level from 15 months. Its decline accelerated after the US released weaker-than-expected inflation data last Wednesday, confirming views that the Federal Reserve is nearing the end of its rate hike cycle.

The dollar has fallen as US Treasury yields fall in recent days, which weakened the attractiveness of the dollar, while strengthening a wide range of other currencies, from the Japanese yen to the Mexican peso, but also the zloty.

Threats to a further decline in the dollar exchange rate

Of course, there is some risk involved with a bearish bias against the dollar. One of them is a potential rebound in US inflation, which could fuel fears of a more hawkish Fed and eliminate many anti-dollar transactionsthat thrived this year.

Although inflation has come down, the US economy remains resilient compared to other countries and few believe the Fed will cut interest rates any time soon, which could potentially limit short-term declines in the dollar. The next Fed decision will take place on July 26. Then we can find out if there will be the last interest rate hike in this amazing cycle, or if there will be one more hike after this one in July. from this the fate of the USD may depend after the current very significant decline in the exchange rate.