Mumbai (Maharashtra) [India], February 4 : A sharp and sustained fall in the US dollar against other major currencies could turn into a recessionary shock for the global economy outside the United States, according to an analysis highlighted in a report by BofA Securities.
The report explained that a sharply weaker dollar would likely slow growth in the rest of the world. As global growth outside the US weakens, it would create deflationary pressures, forcing other countries to respond with monetary policy easing.
This reaction, in turn, would limit how far the dollar can fall, as policy responses abroad would act as a natural floor to further depreciation.
The report said, "A large real depreciation of the dollar vis-a-vis other currencies would be a recessionary shock for the global economy ex-US. And while some economies with strong momentum could withstand it well, most developed economies would not emerge unscathed".
Another important point highlighted in the report is that a disorderly fall in the dollar is not in anyone's interest. Neither the US nor the rest of the world would benefit from an abrupt or uncontrolled depreciation.
It stated that global financial stability relies on orderly currency movements, and a sudden loss of confidence in the dollar could disrupt trade, investment, and financial markets worldwide.
Such a move, the report stated, would act as a recessionary shock for the global economy.
The report also pointed to a changing relationship between the US dollar and US interest rates. Recently, the dollar has weakened even as US interest rates have remained largely stable in the 4.00-4.50 per cent range and stock markets have continued to reach new highs despite periodic volatility.
This decoupling, as per the report, suggests that the dollar may have lost some of its traditional safe-haven and hedging appeal in the face of US-specific policy risks.
The report added that the broader narrative of a collapsing dollar is seen as overstated. The US continues to benefit from strong growth and productivity advantages compared to other advanced economies.
These fundamentals have supported a strong dollar for several years and allowed the US to finance large fiscal and current account deficits.
In summary, while some further dollar depreciation may occur, the report stressed that a large real decline would be damaging for the global economy.
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