Americans' spending spree could come to an end 1:26
(CNN) -- The U.S. dollar is headed for a 3.7% loss this month against a basket of six major currencies, in what would be its worst monthly performance in a year.
That's good news for countries that rely on commodity imports, most of which are traded in dollars, as well as nations that pay dollar-denominated debt. But U.S. businesses and consumers could end up paying more for imported goods.
The U.S. Dollar Index was on the rise between mid-July and early October, rising more than 7% as a slew of positive U.S. economic data boosted expectations that the Federal Reserve will keep interest rates high.
Higher interest rates tend to increase the value of a currency by attracting more foreign capital to the country (as investors anticipate higher returns), which increases demand for the currency.
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But, in recent weeks, signs that the U.S. economy has finally begun to slow convinced investors that the Federal Reserve will no longer raise borrowing costs and will soon resort to cutting rates.
"I can see two more quarters of US dollar weakness, particularly if it becomes even clearer that the Federal Reserve is going to cut interest rates," Ulrich Leuchtmann, head of FX research at Commerzbank, told CNN.
Cameron Willard of Swedish bank Handelsbanken's capital markets team in the U.K. also expects the dollar to continue to fall steadily through the first half of next year, but believes it is likely to reverse course later in the year as geopolitical risks — such as uncertainty around the outcome of several countries' elections — come to the fore.
In turbulent times, investors see the dollar as a safe haven, where their cash will hold its value.
"It's hard for me to see a depreciation of the dollar over the long term," Willard told CNN. "For that to happen, you need to have a credible alternative... (The dollar) is still the world's reserve currency and the safest currency in the world, and I don't see that changing."
For countries that rely on commodity imports, a weaker dollar means they have to pay less for essentials like wheat and crude oil. That, in turn, could cool headline inflation in those economies.
For example, Japan, Korea, India and many of the countries that use the euro rely on commodity imports, said Mark McCormick, global head of FX and emerging markets strategy at TD Securities.
U.S. exporters will also gain because, as the price of their goods falls in other currencies, they become more competitive abroad.
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At the same time, Leuchtmann said, a lower-value dollar raises the cost of imports into the United States, helping U.S. companies that sell domestically compete against foreign rivals because local products become relatively cheaper.
It's also good news for emerging markets. Several emerging economies have dollar-denominated debts, and a weaker dollar can make servicing those debts less expensive.
A drop in the value of the dollar also means better investment opportunities outside the United States, McCormick told CNN.
"A weaker dollar is a rising tide that lifts all boats," he said.
A weak dollar is bad news for U.S. consumers, who can expect to pay more for imported goods like French wine or Chinese-made toys, and more on vacations abroad.
"A weakening dollar basically impoverishes the U.S. a little bit because it pays more for the goods it imports and receives less for the goods it exports," Leuchtmann said.
All things being equal, that drives inflation, he added, but the rate of price increase is also influenced by other factors.
"I'm sure inflation will come down further in the U.S., but the speed of this development will be slower than it would be with a strong dollar," he said.
Handelsbanken's Willard points to the cooling U.S. labor and housing markets as two factors that are likely to keep headline inflation in check, even if the price of imports rises.
"I don't think the Fed is too alarmed at this point," he said.