With the dollar’s rally this month to levels the most in nearly 20 years, analysts have drawn on the “old Tina” argument that there is no alternative to predicting more gains ahead for the strong dollar.
According to an analysis by the Financial Times, what happened two decades ago indicates that the dollar is closer to the peak before the decline stage, as the dollar fell in 2002 with the decline in US stocks, and it remained in this state for six years, in similar circumstances to what is happening now, but this This time, the US currency’s decline may last longer.
The analysis added that, whether those conditions are adjusted to account for inflation or not, the dollar’s value once morest other major currencies is now 20% above its long-term trend, exceeding its 2001 peak.
Since the 1970s, the usual rally in the dollar cycle has continued for regarding seven years; But the current rally is entering its eleventh year, moreover, the fundamental imbalances bode well for the dollar. When the current account deficit consistently exceeds 5% of GDP, it is a reliable sign of financial trouble. The US current account deficit is now approaching the 5% threshold, which has only been breached once since 1960, and that was during the dollar’s decline following 2001.
Countries see their currencies weaken when the rest of the world does not trust their ability to pay their bills. The US currently owes the world a net amount of $18 trillion, or 73% of US GDP, well above the 50% threshold often predicted by previous currency crises.
Investors tend to stay away from the dollar when the US economy slows relative to the rest of the world. In recent years, the United States has been growing faster than the average rate of other advanced economies, but it is poised to grow more slowly than its peers in the coming years.
If the dollar is regarding to enter a downtrend, will that period last long, and go deep enough to threaten the dollar’s standing as the world’s most trusted currency?
Since the 15th century, the last five world empires have issued the global reserve currency – the currency most used by other countries – for an average of 94 years. The dollar has held reserve status for more than 100 years, so its era is already older than most countries. The dollar was strengthened by the weakness of its rivals, and the euro was repeatedly undermined by financial crises.
In addition to the four major currencies – the United States, Europe, Japan and the United Kingdom – lies the category of “others”, which includes the Canadian dollar, the Australian dollar, the Swiss franc and the renminbi. It now accounts for 10% of global reserves, down from 2% in 2001.
The gains of those currencies, which accelerated during the pandemic, came mainly at the expense of the US dollar. The dollar’s share of foreign exchange reserves is currently 59%, the lowest level since 1995, and digital currencies may look damaged now, but they also remain a long-term alternative.
Meanwhile, the impact of US sanctions on Russia shows just how much the US influences a dollar-driven world, inspiring many countries to scramble to search for options. The next step might not be towards a single reserve currency, but for currency blocs.
Southeast Asia’s largest economies are settling payments to each other directly, eschewing the dollar. Malaysia and Singapore are among the countries making similar arrangements with China, which is also offering offers of renminbi support to cash-strapped countries. Central banks from Asia to the Middle East are setting up bilateral currency swap lines, also with the aim of reducing dependence on the dollar.
The FT analysis concluded by emphasizing that today, as in the dot-com era, the dollar appears to be benefiting from its safe haven status, with most of the world’s markets sold off. But investors are not in a hurry to buy American assets, as they reduce their risks everywhere and keep the resulting cash in dollars, stressing that he “likes that we not be deceived by the strong dollar, the post-dollar world is coming.”