USD depreciation could be bad news for world markets

"We have seen the economy progress over the last several months in exactly the way we anticipated," Yellen said in a press conference(pic) following the end of a two-day policy meeting. "We have some confidence in the path the economy is on." - Reuters

The US dollar has been on a steady decline, and at least one observer is saying that this may not be a good thing for world markets. 

Now, low expectations of a US Fed hike at the Federal Open Market Committee on Tuesday are expected to exacerbate matters.

The dollar's decline is a result of the "narrowing of the differential in market expectations for economic growth and monetary policy", Mohamed El-Erian, chief economic adviser to Allianz, wrote in a Financial Times column piece. 

The greenback fell to a 33-month low last Friday with the dollar index, which measures the currency against major currencies, falling 0.6% to 91.11, its weakest level since January 2015.

The ringgit, too, has made gains against the US dollar this year. It traded at a low of 4.4975 to the dollar in April but has since strengthened to 4.1905 at the time of writing.

While the depreciation of the US currency is expected to provide a boost to domestic economic activity and provide support to financial markets, it may also hamper growth efforts in world markets.

According to El-Erian, compensating growth engines in world economies are still weak to counter appreciation in their home currencies. "With limited exceptions, such as Germany, there are very few countries able to absorb and navigate easily a sustained period of sharp currency appreciation."

"Until this situation is resolved through more comprehensive and better co-ordinated policy responses, currency markets will pose a threat to the solidification of a synchronised global recovery needed to validate stock prices around the world in a durable manner," he added.