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Why the US dollar slide may be a sign of real danger this time
- The rare event of a general depreciation of the world’s leading currency suggests a fundamental lack of faith that could sink financial markets and undermine the global economy
- Recent events suggest the dollar could erode from within as the US retreats from international obligations and its domestic economy weakens
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The unnatural calm that settled over financial markets in the wake in the Covid-19 pandemic is being disturbed by ominous signs that the US dollar is in trouble. This is not just a matter of risk-off moments or yield differentials, as some suggest. Something more fundamental is at work.
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What makes the behaviour of the dollar particularly ominous is that the world’s key currency is sliding not only against benchmarks such as gold and silver but also against many measures of value including other key currencies. A general depreciation of the world’s leading currency is rare.
The dollar is at a two-year low against a basket of currencies and US Federal Reserve chairman Jerome Powell’s statement on July 29 that the Fed will keep monetary policy very loose, at least until the end of this year, portends further weakness.
Even if the main reserve and transaction currency is not exactly tottering, its wobbles hint at scenarios where it has to share pole position with other currencies, an unstable state in itself.
Conventional wisdom holds that the dollar will retain pole position as the paramount global currency because the euro is not in a position to offer a real challenge and China is cautious about dismantling yuan exchange controls, while the Japanese yen is not a serious contender.
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Recent events suggest, however, that the dollar could erode from within as the US retreats increasingly from international obligations and as its domestic economy weakens. In that case, some of the many exporters dependent on China could be persuaded to accept more yuan transactions.
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