U.S. Dollar Continues To Fall In Value
Summary
- The recent news out of the U.K. seems to have resulted in a further decline in the value of the U.S. dollar, a decline now in its 14th month.
- The fall in the dollar's value seems to be pretty much "across-the-board" and will apparently continue at least throughout this year.
- Investors seem to be very wary of the economic policies coming out of Washington, D.C. these days, as the Biden administration, supported by the Fed, might be too aggressive.
- Forecasts for the future have the value of the U.S. dollar declining even more.
The U.S. Dollar has taken another hit, as the British Pound jumps up after the recent elections held in the United Kingdom.
On Monday morning, it was taking $1.4140 to purchase one pound. One week ago, the price was around $1.3900 and one month ago, it cost only about $1.3700.
Three reasons are given for the fact that the value of the pound is rising relative to the dollar.
First, Boris Johnson and the Conservative party have "secured a series of election victories" in the midterm elections, and this gives it a tighter control on the government.
Second, the U.K. is moving on toward an opening of its economy as the pandemic recedes.
Third, economic growth is now expected to be even stronger this year, without any real pressure on prices. The Bank of England upped its forecast for the year to 7.25 percent, up from 5.0 percent.
This picture is presented next to the expectations for the U.S., expectations that show a rapid rise in the U.S. economy, but with a rising expectation that inflation will be increasing as well. The economic policy of the Biden administration is being seen more and more as creating higher price inflation when compared with other countries, like the U.K.
This is the prescription for a falling value for the U.S. dollar.
Strategists at UBS Wealth Management see the price of a pound rising to $1.4900 by the end of the year.
But, This Is Nothing New
The value of the dollar has been falling against the pound since the middle of March in 2020, when the Federal Reserve system really began pumping liquidity into the U.S. banking system to fight the possible consequences of the spreading coronavirus pandemic and the economic recession that began in that month. One can see this movement from the accompanying graph.
The turning point actually came on March 18, 2020, when one pound could be purchased for about $1.1640.
But, this was the turning point for most major currencies. Note that on March 18, one Euro cost $1.0696, whereas on Monday morning, May 10, the cost was around $1.2170.
On March 18, it cost $1.4354 to acquire on U.S. dollar, whereas on Monday morning, it only cost around $1.2100. It took about 0.9860 Swiss Francs to buy one U.S. dollar, whereas on Monday morning it only cost about 0.8990. And, one dollar could be acquired by about 7.0960 Chinese Yuan at the earlier date, whereas on Monday morning it cost just 6.4150 Chinese Yuan to buy one dollar.
Across the board, it looks as if the value of the dollar has been declining since the middle of March 2020.
We can look at the trade-weighted U.S. dollar index against the goods and services of advanced foreign countries and see the same thing. The trend is downwards.
What This Movement Means
So, basically, the value of the U.S. dollar began to decline around the time that the Federal Reserve system really began to flood the financial markets with money.
The decline in the value of the U.S dollar began to move downwards a little faster again just around the presidential election in November 2020.
And, the decline in the value of the U.S. dollar has continued up to the present time.
As I have suggested before, it appears as if investors believe that the direction of U.S. economic policy is such that the value of the dollar must decline.
Dollar To Drop
So, a dollar price of the British pound of $1.49 by the end of the year does not seem out-of-the-question. It also does not seem to be unreasonable that it might take as much as a $1.30 to buy one Euro by the end of the year.
The bottom line is that investors appear to believe that the efforts of the Biden administration to pump up the U.S. economy are perhaps getting into the area of "over-kill. This advice should not be just passed off as a market overreaction. At least, the government needs to look at what is happening in the foreign exchange market and give these conclusions some credence.
To me, it is also significant that the market has been moving in the same direction for about 14 months. This movement since the middle of March 2020 is not just a short-term bounce in the market. Investors have seemingly held this same view for a relatively long time, without any "current" events causing it to change directions.
This is certainly a piece of information that should not be quickly dismissed, for it has very strong implications for economic policy and for the state of the economy going forward.
This article was written by
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