Whither the U.S. dollar?
During the past few years, massive bets have been placed against the U.S. dollar. During this same period, I have been asked many times where do I believe the U.S. dollar might be heading.
A number of events turned investor sentiment against the United States: the apparent quagmires in Iraq and Afghanistan; record budget and trade deficits and accelerating indebtedness; a financial system more and more resembling a casino; and a deep recession. Even as the economy shows signs of recovery, trillion dollar deficits and an increasingly dysfunctional system of government in Washington continue to dampen investor sentiments towards the U.S. dollar.
When asked for my opinion, I did agree that the economic and financial fundamentals for the U.S. did not look promising. However, what are the alternatives? What countries or regions appear to be more promising in terms of their longer-term economic and fiscal outlooks?
I did not understand why the Euro appreciated against the U.S. dollar. The fundamentals in the EU seemed to be weaker than in the United States. The EU did not act with one voice in dealing with the recession. It took the crisis in Greece to expose the weaknesses. And the economic recovery in the EU is much more fragile and much less robust than in the United States. Thus, it is not surprising that the Euro has fallen into a tailspin against the U.S. dollar. The same investors who once bet heavily against the U.S. dollar are now betting that the Euro will decline to parity with the U.S. dollar.
I also did not understand why the Yen appreciated against the U.S. dollar. Has anyone noticed that the Japanese economy has been stuck in neutral for over 20 years, and the Government of Japan’s debt to GDP ratio exceeds that of Greece? The increasing value of the Yen exacerbated the economic problems in Japan, and the Japanese Government has yet to find a way to generate sustainable, long-term growth. The demographic, economic and fiscal problems in Japan are much more intractable than they are in the United States.
So who is left? Australia and Canada, both viewed as resource economies, and both with proportionally lower budget deficits than the U.S., have seen their currencies rise sharply in value against the U.S. dollar. But neither country’s currency is really an alternative to the U.S. dollar, and once the commodity price bubble bursts, both the Australian and Canadian dollars will be headed for a steep fall.
Gold has risen sharply in price. While its price has stabilized recently, only the fanatics, who believe that gold is the only safe haven investment, view gold as an alternative to the U.S. dollar. Sooner, rather than later, the gold bulls will be in for bitter disappointment.
We are left with the Chinese renminbi. But China has made it clear that it will not allow the value of its currency to rise sharply against other currencies, especially the U.S. dollar. Moreover, an appreciation of the renminbi would not do much to improve the economic or fiscal fundamentals in the United States.
Yes, the U.S. dollar might look weak in theory, but at this time there does not seem to be anywhere to turn. So my answer when asked “whither goes the U.S. dollar” has been and continues to be “who knows”?
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs
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