Why is us dollar going down

 

Analysts have been warning of the dollar's impending doom. I don't want to be overly dramatic, but I think it's. I will use the word doomed in the long term. The US dollar is the most powerful currency that exists today. It's accepted and traded almost everywhere in the world and has shown strong resilience through numerous financial shocks and mounting fiscal debt. The US dollar for the last couple of decades has been the preeminent global currency in virtually every dimension you can think of. It allows us to have a great demand for our currency and our bonds. So it often allows us to live a bit beyond our means so we can borrow easily and at low-interest rates in the world to finance economic growth.

But some experts worry that the dollar's dominance may be under threat. We tend to think that nothing could ever dislodge the dollar from this preeminent status as the world's currency. That view is overblown and ultimately will be challenged. So what poses a threat to the dollar's status as the world's reserve currency? And just how long can its dominance last? America's growing account deficit is one of the biggest threats to the dollar. The US dollar ought to be under threat. After all, the US government has been running massive deficits for a long time, which should in principle be reflected in high inflation, which in turn should reduce the dollar's value and the dollar's role as an international currency.

This is most evident in America's current account deficit, which means the value of imported goods and services exceeds the value of exported goods and services. The current account balance, as we call it, has been in deficit every single year since the early 1980s. Some years it's modest and some years it's big and right now it's big in the US. During the fourth quarter of 2021, the US current account deficit hit $217.9 billion, amounting to 3.6% of America's GDP. Experts like Stephen Roach believe that this growing deficit is directly related to a low national saving rate. And when countries do not save, which is the case in the United States, we end up borrowing surplus savings from abroad to square the circle. We can do that because we have this almighty dollar, the world's the great reserve currency, and so we have been borrowing massive amounts of foreign savings from abroad, and it provides a relatively painless way of financing our current account deficit until something happens that changes the minds of foreign nations who want to lend us their surplus capital, their surplus saving. And I think there's a risk of that down the road as our The international balance of payments deficit continues to expand.

The US dollar has been the world's reserve currency since most countries abandoned the gold standard. America went off the gold standard. An ounce of gold is split up into 20 pieces each called a dollar. That means a substantial amount is held by central banks and major financial institutions to use for international transactions. But its share has been steadily dropping. During the fourth quarter of 2020, the dollar share in the Global Foreign Exchange Reserve dropped to its lowest share in over 25 years. The rise in alternative currencies may be to blame. It has come down partly because of the introduction of the euro. The euro has become held to a greater extent over the years. The renminbi started playing a role as a reserve currency just a few years ago. And it accounts for a relatively modest share, less than 3% of global foreign exchange reserves. But it's been chipping away very modestly at the dollar's role. Plus, there are other reserve currencies, including the Japanese yen, the British pound sterling, but even some of the smaller reserve currencies, such as the The Canadian dollar and the Australian dollar, have all gained marginally in terms of their shares.

While the recent geopolitical crisis has caused investors to flock to the dollar, strengthening its position, whether that safety will last is another question. The fact that we may have overlooked some alternatives, whether it's the euro, the renminbi or, dare I say, cryptocurrencies, the case for a weaker dollar is one that I think we will then address again. Why does the value of the dollar decrease and increase? When the dollar softens, it usually isn't a cause for concern. It could even be beneficial for the US economy. Sometimes if the economy is faltering, having a weaker currency can provide a boost to those exports by making them more competitive in the global market. So a weaker dollar at times could certainly be a benefit. The flip side is too weak s dollar means that you tend to get high inflation and that can be discouraging to foreign investment. If the dollar becomes too weak, it has the potential to have a catastrophic impact on the American economy.

It would make imports a lot more expensive, and that would certainly drive up inflation. And if that came at a time when inflation was already rising, as is the case right now, that would certainly put a lot of pressure on the US economy. If foreign investors started dumping the U.S. government bonds and other types that would certainly drive up interest rates, which would in turn would make them all the rates on borrowing by the U.S. consumers and companies much more expensive, which might substantially affect both consumption and investment and bring down economic growth. In response, the equity and commodity market would most likely take a hit as well. Most commodities are priced in dollars, and if the dollar were to go down, that would certainly have a significant impact on commodity prices around the world.

A severely weakened dollar would also mean bad news for economies around the a world that has grown dependent on. It certainly would reduce the value of a lot of US dollar assets and that could create a lot of havoc in the global economy. Any time you have turmoil in the U.S. financial markets, that are going to spill over to the rest of the world. The same is going to be true of the U.S. dollar because after all when the U.S. dollar depreciates, it has to depreciate against the other currencies of the world. And that would hurt those economies because many of them, including the Eurozone, China, and Japan, rely a great deal on exports for economic growth. Most experts, however, argue that the US dollar is far from the end of its reign. I think the chances of that happening in my lifetime are negligible. The world's reserve currency, the US dollar, usually has an independent central bank. It has a strong, usually military backing to provide that security, has deep and liquid bond markets that foreign investors can invest in. When we've seen concerns about events in the global economy, whether it's the economy or geopolitical events, the dollar has gone up, not down.

It's seen as a haven.

What happens when there is financial turmoil either in the U.S. or around the world? Investors around the world are going to look for safety and what is the only real place that you can go for safety in large amounts? The US financial markets. This is why I think a dollar collapse is quite unlikely because the implications of a dollar collapse that you would have a real search for safety and the only safe place to put lots of money remains the The US. While the pandemic did cause volatility in the price of the dollar, its value today hasn't seen much decline compared to prices before the pandemic. The US economy has done better than most other economies through the pandemic. It recovered more quickly. Our interest rates are moving up faster than they are in other countries, which means you earn more by putting your money in US dollars than you might say earn in Japanese yen or alternatives. The dollar continues to be quite strong. And then when we get these moments of flight to safety, as we've seen with the outbreak of the war in Ukraine, the dollar's tended to go up as investors look to the most liquid and safest markets to put their money in. Concerns over account deficit and the net savings rate could be overblown.

We've certainly seen our debt to GDP rise, but our cost of financing the debt has been quite low, so it hasn't been particularly onerous for the economy to service that debt. Most importantly, while there may be alternatives to the dollar, there just isn't a realistic alternative for a reserve currency. When you think about what's required to have the world's reserve currency, it needs to be freely convertible. China's currency is not. They have capital controls. You need an independent central bank. You need large and liquid debt markets. Europe certainly is a large economy, but its debt markets are somewhat fragmented because it's a combination of different countries. And so you put that all together and right now there's no kind of present currency alternative. I don't know what the future of crypto is, but it was certainly nowhere close, I would say in the evolution of that, to even think about it, you know, taking the place of the US dollar. For now, the dollar's dominance will likely continue, but so will speculation surrounding its health.

The dollar is emblematic of strength in international finance, but it's also emblematic of the obligation that we have. For running our economy in a way that is compatible with that enduring strength. And there are a lot of issues, some of which I've raised, that draw questions into that presumption that need to be looked at very seriously.