I have been warning for some time now about the danger that the US dollar faces. For one thing, the weaponizing of the dollar with the heavy handed use of sanctions has forced countries threatened by sanctions to seek a work-around to the US-controlled SWIFT system. Europe opted for INSTEX, which enables it to trade with Iran without being detected. China and Russia have developed a method of swapping yuan and roubles. Russia and China made a $400 billion pipeline deal for delivery of gas to China for several years. All of this and much more has led to a decline in the use of the USD in foreign trade settlements. And economists know that the less the dollar is used in foreign trade, the less it is worth.
Now, thanks to the pandemic, the Fed is issuing trillions in unbacked dollars as an emergency measure, most of which goes to billionaires in businesses affected by the pandemic. Much of this is being sunk into the stock and bond market, where it will do nothing to mend the economy.
Economists like former Morgan Stanley top economist Stephen Roach and Deutsche Bank’s Asia specialist Shameer Goel warned recently that the US dollar would lose value as a result of this rampant dollar printing. In fact Goel predicted that the dollar would lose its dominant position as a world reserve currency. Now we are seeing the first signs of this happening.
The Economic Times of India ran two reports on this, here. Some quotes:
“The dollar’s strength is well and truly over for now,” said George Boubouras, head of research at hedge fund K2 Asset Management.
“The dollar fell against all its Group-of-10 peers on Monday, with the Japanese yen and Norwegian krone rising 0.6% and the Swedish krona gaining 0.7%. The Bloomberg Dollar Spot Index dropped as much as 0.8%, extending four weeks of losses, the longest streak since early 2019.”
“The euro is another potential candidate for money managers seeking safety. The currency’s surge past $1.17 to levels not seen since September 2018 could be the beginning stages of a shift toward the euro zone after the union banded together to agree on a historic recovery fund.”
This latter quote corroborates an observation I made back in July 2017, here about the possibility of the euro edging out the dollar.
“The dollar should continue making new lows,” said Win Thin, global head of currency strategy at Brown Brothers Harriman, who sees the euro testing September 2018 highs. “The economic underperformance of the U.S. is likely to feed into continued underperformance of the dollar.”
The weakness has been so pronounced that it’s drawn comments from the likes of billionaire investor Ray Dalio, who says the conflict between the U.S. and China would further harm the dollar.
“U.S. exceptionalism has eroded, the Fed is in a mind-set of restoring jobs at the moment and it’s going to drive them to provide potentially more policy accommodation,” said portfolio manager Stuart Simmons. “That’s all dollar negative.”
Finally, I need to point out that, since no V-shaped recovery is expected, the Fed will almost certainly see it necessary to print more unbacked trillions. One observer said it would probably print one trillion per month in the event of a second wave of COVID infections. Now if the trillions printed so far since the onset of the pandemic have already spooked investors not to invest in the US dollar, imagine what must lie ahead. And once the dollar is dethroned as the world’s dominant reserve currency, it is hard to imagine it ever being restored after that.
The pandemic was not the US government’s fault. But the policy of throwing trillions at wars and arms was a constant of US politicians for decades. Now in retrospect, perhaps the politicians who spent all this cash they didn’t have may regret not having put some aside for a rainy day. The way China and Russia have been doing for many years.