The US dollar slid the most in 9 months in April as the rest of the world’s outlook brightened – and analysts say it has further to drop

$100 bills
The dollar rose sharply in the first quarter but slid in April. Valera Golovniov/SOPA Images/LightRocket via Getty Images

The US dollar was on track for its biggest monthly fall since July 2020 on Friday, after improving growth prospects around the world and the Federal Reserve’s strong commitment to keeping interest rates low caused traders to turn away from the greenback.

The dollar index – a measure of the dollar against six other currencies – had dropped 2.5% in the month to Friday, after climbing sharply in the first three months of the year.

April’s fall was the biggest since the index tumbled 4% in July of last year as the country grappled with the coronavirus crisis, in the sharpest drop in a decade.

Historically, April is the weakest month of the year for the dollar index, when it has fallen by 0.96% on average over the last six years. This year’s decline was also the biggest April fall since 2015. And analysts said the dollar was likely to slide further this year, as the global economy recovered.

The dollar’s weakness has been driven in large part by investors reappraising the growth prospects of other countries, Derek Halpenny, head of European research at Japanese bank MUFG, told Insider.

For instance, he said, “it’s this stellar turnaround in the vaccine picture in Europe in particular that’s helped the euro to rebound.” The euro had climbed around 3% against the dollar in April to around $1.208.

Esther Reichelt, foreign exchange strategist at Germany’s Commerzbank, told Insider the Federal Reserve had also played a key part by repeatedly pledging to hold down interest rates at record-low levels.

Lower interest rates typically weigh on a currency, as they make investments in that currency less attractive. The Fed’s dovish stance led to a dip in US bond yields in April, with the yield on the key 10-year US Treasury down to 1.644% on Friday after touching 1.75% earlier in the month.

Going into 2021, investors were adamant the dollar would fall sharply as the Fed kept rates low and global growth picked up, drawing investment away from the US.

But the greenback instead rallied sharply as the US economy roared ahead of the rest of the world, where many countries were still grappling with COVID-19. Investors increasingly bet the Fed would have to raise rates in response to stronger growth and inflation, boosting bond yields and the dollar.

Yet investors have now started to question that view again, Reichelt said. “This concern that inflation might actually not increase strongly enough that the Fed will actually hike rates… has materialized in April and led to this correction in the US dollar.”

Both Halpenny and Reichelt said they thought the dollar would continue to fall over the rest of the year.

“We’re bearish on the dollar,” Halpenny said. “Despite the stellar data that is coming and will be coming from the US, we’re going back to where we were at the beginning of the year, which is the focus on the global synchronized upswing.”

He added: “There’s a finite amount of capital, and if there’s investment interest in non-dollar countries… there’s going to be demand for non-dollar currencies.”

Reichelt said that inflation – which rose to 2.6% in March – would cause volatility in the dollar this year, as traders reacted to data releases.

But she said the dollar is likely to have fallen further by the end of the year, as long-term factors holding down inflation will still be in place. Such factors include relatively high unemployment.

The dollar index had risen 0.27% on Friday to 90.86. It was down from a high of 93.34 in early April, having started the year at 89.93.

Monthly performance of the dollar index
Monthly performance of the dollar index Bloomberg/Insider