What's going on?

The US dollar dropped to a three-year low versus a basket of other major currencies on Monday, highlighting a protracted slide in the value of the greenback over recent months.

What does this mean?

Suggestions that the European Central Bank may increasingly wind down its accommodative monetary policy in 2018, combined with progress in talks to set up a new German government, have encouraged investors to buy the euro, bolstering its value relative to the dollar in the past week. Meanwhile the pound has also been making steady gains against the dollar since Friday.


On top of that, the Chinese yuan hit a more than two-year high against the dollar on Monday after Germany�s central bank said it had started holding backup cash reserves of yuan, given the growing importance of the currency to Germany�s exporters.

Why should I care?

The bigger picture: January could mark the US dollar�s ninth consecutive month of decline against other currencies.

Back around 2014, the dollar surged as investors felt more secure with the US� steady post-financial crisis growth. Recently, however, investors have been pouring into other major currencies in the hope of benefiting from an apparent uptick in global economic growth � despite data suggesting that the dollar should still be an attractive currency for investors to hold! Some experts reckon that the extended decline is merely correcting the overvaluation of past years.

For markets: European equities could come under fire if their respective currencies gain too much.

Since many large European companies also sell their products in American markets, their earnings can take a serious knock if the value of the US currency goes down. Since the US dollar is currently declining in value versus European currencies, the value of European companies� US earnings will also decline � and that might dissuade some investors from buying their shares (admittedly, many companies use derivative products to limit the impact of currency swings). However, the reverse is true for American companies active in Europe.