Hogwash, says Martin Wolf, chief economics commentator at The Financial Times. In fact, Wolf believes there could be a "big shock upwards" for the dollar in the next six months as the Fed takes concrete steps toward tightening (or actually does raise rates.) That, in turn, would prompt an unwind of the dollar carry trade and cause major upheaval in so-called risk assets currently being purchased with borrowed dollars, i.e. stocks, commodities and high-yield bonds.
This view stems from a belief that Fed policy and interest rate differentials are the main drivers of the dollar strength or weakness, not deficits and government spending.
As for the mega-bearish views on the dollar's "inevitable" decline, Wolf makes the following observations:
- The dollar isn't going into terminal decline because America isn't Zimbabwe or Weimar Germany, Wolf says, adding: "This is not a country with stupendous debt." (That's heresy to the dollar doomsayers but America's debt-to-GDP is not as high as that of many other industrialized nations, much less Zimbabwe or the like.)
- The dollar won't lose its reserve status because there needs to be a viable alternative, Wolf says. Right now, only the euro provides legitimate competition to the dollar and will likely gain a higher share of international reserves over time vs. the current 65% dollars and 25% euros. But the Eurozone has its own problems, he notes, most notably high deficits and debts. (Just like America!)
"Remember what happened in the crisis [of 2008] -- people bought dollars," Wolf recalls. "There is no better indication than that of the market's belief [the dollar] is the safe haven, and that hasn't changed."