U.S. Dollar Decline: Just a Matter of Time

It looks the rest of the world is getting tired of using the once mighty Greenback as it's reserve currency. Recent reports show that China and other emerging super powers have started seriously calling for the creation of a new global currency to eventually replace the US dollar. China, the largest foreign holder of US debt ($2 trillion), is behind the current push for moving away from the global fiat currency because of frustration at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. President Obama was forced to publicly assure the Chinese that all is well. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

It's still early and calls for moving to a non-US dollar world standard are not new. In fact, the Euro was starting to do this, but the global recession has placed a lot of stress on Euro member countries which in turn raised fears about the Euro's stability. Furthermore, the technical and political hurdles to implementing a new global currency are enormous, so even if backed by a coalition of nations, it is unlikely to change the dollar's role in the short term. This is clearly demonstrated by the fact that central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency combined. However, the longer term (5+ years) picture is not that great for the US dollar and eventually the current deficit spending will catch up.

The appreciation of the dollar over the last few months was primarily due to a perceived flight to safety in US treasuries, which foreign investors and governments bought as other asset classes became more risky. However with all the trillions in stimulus spending, bank bailouts and other fiscal policy measures many are now questioning the impacts on the future value of the US dollar. In an ironic twist, should the local and global economy start to show signs of real improvement, the US dollar will most likely plummet as the "safety" trade unwinds. Case in point, as the stock market jumped 20% over the last two weeks on possible signs of a recovery, the dollar index (DXY), a measure of the greenback strength against a trade-weighted basket of six major currencies, dropped by over 10%.

There is not much do in the short term - the US dollar/debt is the only game in town for now, with few alternatives other than gold. But longer term and if you are mainly an equity investor you need to factor in that the fall of the US dollar is more likely than not. Unfortunately, the lower US dollar will also drive inflation domestically and reduce our consumer and corporate purchasing power. No one knows currency movements for sure, but your best bet is to ensure you have significant international diversification in your retirement and trading portfolios.

Comments

[ksmithdc:]

Let's just print a trillion more. That'll do wonders for the value of the dollar.

Mar 27 08:38 AM

[fireball:]

in a matter of the time of my lifetime the dollar has at best been decimated. it depends on what measurement you use. if you measure it by gold it is roughly 3 tims worse.
when it is completely worthless we have the promised change. a car hitting a tree is change and reformation.
if you haven't purhased a little precious metal insurance it might be a good time. the debt instruments, federal reserve notes included are nothing more than a note to promising payment.
examining the new notes closely thy seem to say nobody owes you anything for this green piece of paper.

Mar 27 09:06 AM

[kelm:]

Technically the near term down trend should re-assert itself in the next few days possible associated with the G20 meeting. Russia has stated that they are increasing the level of gold they are holing in their central bank. China is now the second largest gold producer in the world and seems set on significantly ramping up production. I think that at some level both nations are looking to hold more metal as a reserve.

If the supra national reserve currency does materialize I would not be surprised to see gold and potentially oil somehow included. This could lead to a re-valuation of gold upward as the world, wracked in an inflationary spiral, collectively re-sets their currencies.

Mar 27 09:21 AM

[Mad Hedge F...:]

I'm a total believer! Could we see $1.20 or $1.00 for the greenback in an event driven overshoot short term? You betcha! But longer term, the trend is still down. Obama’s highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don’t bet against the 45 year trend. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!

Mar 27 11:22 AM

[eieinli:]

WAKE UP AMERICA! HYPERINFLATION IS ALREADY HERE. It's just a matter of time before the dollar becomes totally worthless.
Haven't you noticed? They are throwing trillions of (no more billions) your dollars like it's going out of style.
Geithner should resign. Maybe he should run AIG instead. Bernanke should resign. He got trapped into a position where there is no escape. Printing dollars won't solve the bigger problem-our future and our grandchildren's future. The brilliant professor will ruin us all.
With all due respect to President Obama, you think that your razzle and dazzle will work. This is not basketball. Whatever happened to "haste makes waste". I thought you got elected to make humongous changes in how things are done in Washington. Instead Washington change you in less than 100 days.
Instead of stopping the war in Iraq you are merely switching it over to Afghanistan and expanding it to Pakistan. Instead of taking care of the people on Main St, you are taking care of Wall St. I thought it was the "small" people who made $10 & $20 contributions on the internet who got you elected. Or have you forgotten already. Is it really the thousands if not millions that Wall St contributed?
I can go on and on but you are now presiding and leading in the destruction of the once "Almighty Dollar". So when you talk about reducing the deficit in half by the "END OF YOUR FIRST TERM", this will probably your only term.

Mar 27 11:46 AM

[AndrewBaker:]

The dollar will fall for the reasons we all know about, but when you consider all the dollar debt that foreign governments, corporations and investors hold, it won't fall by that much unless these holders start to sell off their holdings, when it will become a rout. And this is possible. Bail out funds of every description plus "quantititive easing" (QE) are all going to combine to weaken the dollar, which could easily push up prices of dollar denominated commodities. Add in inflation, once we have the deflation aspect out of the way - which QE will ensure - and the run on the dollar could be massive. None of this will happen until gold goes back above $1000 and keeps going north, so then will be the time to worry.

Mar 27 01:37 PM

[Vox Rationalis:]

"There is not much do in the short term - the US dollar/debt is the only game in town for now, with few alternatives other than gold. But longer term and if you are mainly an equity investor you need to factor in that the fall of the US dollar is more likely than not. Unfortunately, the lower US dollar will also drive inflation domestically and reduce our consumer and corporate purchasing power."

Not sure what the first sentence here means. As for the rest, gold has benefited from the fear trade just as the dollar has, rising to historically high values against silver and platinum - I would buy one or both of these and sell gold. Equities are a surprisingly good inflation hedge historically, as nominal profits increase as prices rise.

Mar 27 02:06 PM

[IronMeteor:]

I heared this same argument in 1973, 1978, 1987, 1991, 1995, 1998, 2001, and Big time in 2007 and now everyday. Here we are, still trucking along with Gold at the same price relative to my dollars as in the 70's.

Central banks all work together. They hate each other and talk tough, but at the crises moments, they band together and keep the paper money scam going. I am not holding my breath this time either.

Each CB knows that if the dollar scam is exposed, then maybe all paper money will be exposed. That logic seems to hold true and every dollar hiccup creates a global recession and global fear trade in the end.

I believe you are right, but how much time are we talking - 30 yrs. I have better things to do in the meantime. Good luck waiting.

Mar 27 03:03 PM

[dybydx:]

Unfortunately many of us have more than 30 years to live and must live to see that day. There are many institutional investors and soverign entities with horizons going beyond that. Personally I would not invest any of my pension money in USD denominated assets.

More and more facts are showing that the long term outlook of the US econ is negative. While the nominal and real GDP may continue to grow, US debt is going to grow even faster.

Mar 27 06:02 PM

[Stephen Str...:]

When my Grandparents were alive, 1 UK pound was 1 gold sovereign. This now sells for up to 200 UKP each. The old satirical headline 1 pound falls to 1 penny has actually come true in a single lifetime.

Just as the British Empire once ruled a quarter of the globe and the world reserve currency, the pound, seemed unassailable, the risk now for the USD is that in a lifetime it too will fall to 1 penny. With annual 5% inflation, this would take just under 90 years, and a few bad years would accelerate this.

If the US $ loses its reserve currency status, the US will have to go through the painful process that the UK had to do: "buy back" all those foreign held dollars by hard work or inflation.

Mar 28 03:02 PM

[Northstar10000:]

Dollar chart looks really toppy here. It will break up or down and fast in either direction. Every chart that shows that pattern breaks sharply one way or the other. It hit a top at close to 90 so the best bet and it is only a bet is long gold or short some dollar\bond thing.
TBT anyone!! If it take out 90 it will go to 100. If that happens things have to get really really bad world wide. I think a bit of inflation is most likely here before the Kondrafie Ice Age sets in. Happy thoughts anyone !!!!

Mar 31 04:44 PM