The U.S. Dollar Continues To Decline: What's Going On
Summary
- The value of the US dollar continues to fall and there is a growing feeling that it will decline much further in the near future.
- The one major thing that seems to have changed is political sentiment as concern has risen that the Federal Reserve cannot carry the full burden of the federal government.
- A substantial decline in the value of the dollar will not help the US to finance its huge fiscal deficits or to get the economy growing more rapidly.
Wednesday morning, June 10, 2020, the value of the US dollar continues to decline.
Around the opening on Wednesday, the US Dollar Index (DXY) was around 96.10 and one Euro could be purchased for $1.1385.
About one month ago, on May 15, the US Dollar Index stood at 100.40 and one Euro cost only $1.0898.
The dollar declined about 4.2 percent in value during this time period.
My views on the possibility of a decline in the value of the US dollar were presented in two posts, the first one was presented on June 2, 2020 and the second one was posted a day later.
My concern was with the growing separation of the United States from its primary allies. I wrote,
The one thing that only a few commentators have written about is that a change has occurred in political sentiment.
And I quoted Steven Erlanger from the New York Times.
With American cities burning and the coronavirus still raging, killing more people than in any other country, President Trump also has growing problems overseas. He has never before been so isolated and ignored, even mocked.
Growing Overseas Concern
In recent weeks this concern has grown.
Notice the comments by Stephen Roach in Bloomberg Opinion titled “A Crash in the Dollar is Coming.”
Mr. Roach states that the value of the US dollar has remained strong because of the “typical safe-haven demand” that the United States has benefited from.
I have reported constantly over the past year or so about how risk-averse foreign money has been attracted to the United States as a safe haven for the funds. One of the reasons for this flow has been that the United States dollar has been the reserve currency of the world.
A second reason for the continued trust in the dollar has been the actions of Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, and the Federal Reserve in moving to provide liquidity to the US financial system and to coordinate with other central banks around the world to assure them that they would have adequate liquidity to support their financial systems. As a part of this, the Fed has provided almost $500 billion in central bank liquidity swaps to monetary authorities around the world to support global financial systems.
The Federal Reserve moved to bring out this support in late February and has been leading the effort to keep the financial system and the economy afloat ever since.
Through most of this time, the value of the US dollar has remained quite strong.
But, even though Mr. Powell and the Fed continue to provide everything they can to support the system, the value of the dollar has begun to decline. And, Mr. Roach contends that the dollar will continue to fall. I feel the same way that Mr. Roach does.
What Has Changed?
After presenting material on why the dollar has remained strong, Mr. Roach writes,
The key question is what will spark the decline?
The answer is, as I stated above, there has been a change in political sentiment. Whereas quite a few policy changes have occurred over the past three years or so, the basic feeling in financial markets has been that the Federal Reserve is acting in a way that will support the economy and the stock market and these other matters will just work themselves out over time. That is, even though the policy changes have not been that attractive to investors, the Federal Reserve actions have been sufficiently strong to serve as the foundation for the continued expansion of the economy. The evidence this was the length of the recent economic expansion, which was the longest economic expansion in United States history.
Now, however, investors are realizing that maybe the Federal Reserve cannot carry the entire burden. The political actions that have recently been taken in Washington, D.C., Mr. Roach believes, are not supportive of strong economic growth. In fact, if anything, they are destructive of world trade and world cooperative interactions.
Mr. Roach lists the actions he believes to be behind the loss of confidence in the United States:
Protectionist trade policies, withdrawal from the architectural pillars of globalization such as the Paris Agreement on Climate, Trans-Pacific Partnership, World Health Organization and traditional Atlantic alliances, gross mismanagement of COVID-19 response, together with wrenching social turmoil not seen since the late 1960s, are all painfully visible manifestations of America’s sharply diminished global leadership.
Further evidence includes the collapse in US relations with Germany, highlighted by the announcement that US troops will be withdrawn from Germany, and the growing gulf between the leadership of the two nations.
Not Good For The Dollar
Political sentiment has changed and this attitude is beginning to take its toll on the value of the US dollar.
And, when the dollar declines, there will be important repercussions in the US economy.
The US savings rate has fallen in recent years, as there was a major shortfall in US saving even before the pandemic. This shortfall has been one reason the US has had to rely so much on savings from around the world to finance deficits, especially those coming from the federal government.
Exploding federal deficits with a falling value for the dollar will not be a good combination for the economy going forward. It will not be a good combination for the stock market. I have already discussed this latter point.
Bottom line: there is a pandemic wreaking havoc on the US economy, there is falling confidence in the US government in the world, and all of this is contributing to the radical uncertainty that exists.
The behavior of the US dollar just reflects the various things that are now happening. Investors need to pay attention to what happens to the dollar in order to better understand what is happening elsewhere.
This article was written by
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Comments (42)
We all know that people go to sites and articles that confirm their own bias..that does not make it on point. Maybe the author has suffered losses from his premise..and saying contentious nonsense to get eyes on.. and just maybe the dollar decline is a response to anarchy and that is concern, and should I take his arguments as fact..when it is opinion .
The United Stated has always been seen as a rock solid, steady, you know what you get country. A unique Constitution and Bill of Rights, world leading justice system where all are equal. Rock solid capitalist based economy. Smooth transition of power after elections. And much more. All these assumptions have crumbled over recent time.Hilary and others blatant crimes went unpunished. Equal justice under the law? Some of us have always known that there is a two tier legal system in America, but now its thrown out there for the whole world to see. Very Banana Republic.Then you have the Obama Administration using the FBI, CIA, and Foreign assets to spy on a political campaign which continued into the Presidency. Then, the whole Democratic party, using known lies, tried to take down the President. Millions of tax payer dollars wasted on Russian collusion and quip pro "JOE" lies. The world sees this a a coup attempt. And the guilty go unpunished. Rock solid government?
Then there is the disastrous Covid 19 event. Peoples rights taken away. Random mayors and governors stomping on the Constitution. The very unconstitutional banning of religious gatherings. So that leaves the world wondering if the Constitution is worth the paper its written on. Also there is the big Socialist movement going on despite all the failed attempts at Socialism throughout the world. A attack on the very foundation that has made America great. So if I were a outsider looking at all these things, I would have to say I would loose confidence in the U.S. dollar.
The worry is obvious and real;I.e. that the Fed us creating a stagflation in the US or even worse.
BRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR
M2(Feb)=15508.3 billion
M2(May 25) = 18115.1 billion ..
M2 has increased by 16.8% in the same period.
Big moneys are looking for doors to escape, this is movement behind the stock market ..(edited)
And the decline in the $’s exchange rate began when the FED initiated an all-out assault on the economic contraction.
www.eidebailly.com/...
www.federalreserve.gov/...“The caveat to this change is if your customers are allowed to exceed the transaction limitation, these account balances must be reclassified to transaction accounts when submitting the FR 2900 report.” So, we will know to what extent savings are utilized. “M1 at percent change at seasonally adjusted annual rates, Thirteen weeks ending May 25, 2020 from thirteen weeks ending Feb 24, 2020 or a phenomenal 67.2 percent.
www.federalreserve.gov/...
Educated Americans look upon France as a country with great food and traditions but also one with government policies which can be referred to as disastrous . Its economic regulations are the most restrictive among developed countries and its immigration policies have transformed the country to large numbers of no go zones in which the police and doctors are afraid to go. Sharia law is de facto the law in these no go zones.
Economic growth has been anemic for years with unemployment above 8% for decades. Economic deficits are estimated to be 130% of GDP by the end of 2021.
Americans are worried about the stability of such a country , which has nuclear weapons