- 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 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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