QVMS - The U.S. Dollar At War

• The US Dollar has recently shown strength.
• Inflation is rather high.
• The geopolitical situation is unstable.

This article examines the present state of the American currency and possible effects on it caused by the geopolitical situation. The Dollar is still strong despite high inflation and large-scale government spending.

The Strong US Dollar

At the present time it is clear that the US Dollar is still strong in Forex markets. The US Dollar Index shows this .

It should be understood that this index reflects to a great extent the exchange rate between the Euro and the Dollar. The Euro has weakened considerably due to the effect of the rising prices of energy caused by the application of sanctions on Russia. The German economy, the biggest in the EU, has been hit hard by the higher energy costs and will probably suffer even more as the shortages worsen. The Euro is now at par with the US Dollar.

It should be obvious to investors that the Euro could slide further in respect to the US Dollar as the energy crunch tightens around the EU.

Inflation Rages

The latest figures regarding inflation in the US indicate that the phenomenon is neither transitory nor negligible. In fact the numbers are the highest in 40 years. Investors suffer considerably as the purchasing power of their investments lessens unless the increase in their capital is equal or higher than the inflation rate. If it is less, their wealth is decreasing. The recent inflections in the stock markets are therefore exceedingly deleterious for investors.

The reasons for inflation have been discussed practically ad infinitum and ad nauseam by market observers. With the Fed now weighing in with higher interest rates, for the moment, it is only to be expected that the general market situation will worsen as the Fed has a habit of being behind the curve. Expectations are that the Fed will ease off interest rate hikes intended to curb inflation as the economy lurches into recession. The stock markets will suffer as the Fed raises rates, and it is doubtful that there will be a strong recovery in stock prices if the economy is in fact in the throes of a recession. Either way the prospects for investors are not positive.

The Coming Storm

This writer has argued that the US Dollar is headed for a fall that will be marked by significant devaluation. The argument is that the huge trade deficit that keeps getting larger and is currently $85 billion a month, the federal debt that is now over $30.5 trillion, the inflation rate that is over 9% even by government statistics, the huge federal budget deficit of $1.7 trillion and all the recent appropriations approved for Ukraine are going to bring about a rapid decline in the value of the US Dollar. It has to be admitted that the US Dollar, as noted above, has maintained its value in Forex markets. It there is going to be a new economic order due to the emergence of the BRICS as a trading block, as is highly probable, then demand for UD dollars will decrease. One problem with this thesis is that EM dollar-denominated debt is over $4 trillion (Emerging markets' dollar debt) .

Servicing and rolling over so much debt means demand for US Dollars is probably going to persist for a long time. One possibility, however, is that excessive dollar strength is going to lead to a series of defaults in EM debt. A recent example is Sri Lanka. In the event that China steps in and puts large amounts of yuan in the form of loans in circulation. The fact that the Fed is intent on raising interest rates in order to fight inflation could lead to some countries opting out of US Dollar financing and choosing other currencies for sovereign debt. This remains to be seen.

Of course there is also the fact that about 90% of commercial transactions are in US Dollars, and this means that the Forex market of $6 trillion a day is dominated by the greenback. This could change as BRICS countries avoid the Dollar in their trading agreements.

Yet another possibility is that the war in Ukraine drags on and ever greater amounts of US money are needed to keep Ukraine afloat. The Biden Administration may test the limits of budget debt financing. In any case it seems that the US Dollar should depreciate but the critical moment has not yet arrived.

This writer was predicting high inflation when it seemed that US inflation was not going to go over 2%. Unfortunately this call turned out to be correct. It would be a great misfortune for the US should the Dollar fall victim to the reckless financial policies pursued by the Government. Investors should take precautions to protect their wealth while there is still time to get out of harm's way.

One thing that investors can do is to invest in REITs. The economy is not growing because capital is going into existing assets. Investors are joining the rentier class by owning real estate that can be rented out to people that cannot afford to buy a single home or apartment. Affordability of housing has significantly worsened in the past few months due to inflation and higher interest rates. Owning a property directly as an investor entails having to manage it. That means finding a tenant, looking after maintenance, collecting rents, etc. The usual practice is to engage a rental agent. That requires checking up on the agent. REITs do all the leg work and are also negotiable, that is, the shares can be marketed. Buying a property entails expenses and so does selling a property while ownership brings with it taxation by the local government. Investors are freed from all these burdens by turning to REITs. The good thing about real estate is that prices for property usually rise along with inflation. That is why many private equity companies are piling into real estate in one way or another. So this is one way that investors can protect themselves against inflation and the coming US Dollar devaluation.

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