Summary
- The US Dollar has strengthened recently.
- The Euro has weakened and is at par with the US Dollar.
- The future of US Dollar dominance is uncertain.
The US Dollar ((USD)) has recently strengthened considerably. The Euro has weakened significantly. USD global dominance is by no means certain.
USD Strength
The USD index has shown recent changes in favour of the greenback.
With the index at 109.04 at the time of writing one has to go back to 2002 to find a higher reading (119) or 1985 (146). The reasons for USD strength may be found in weakness of the Euro, which currently accounts for a large portion of the index. Other reasons are that the USD is still considered a safe haven and is still the main currency in international trade, particularly commodities and finance. Large amounts of debt create demand for rollover and servicing debt. The petrodollar is still alive and functioning although not as before. The conflict in Ukraine could also be considered a factor. The decision of the Fed to raise interest rates creates demand for dollars since many other central banks still have a policy of low interest rates. On the other hand the USD may well be overvalued.
A strong USD has certain effects. It encourages outsourcing, which is not good for American manufacturing. See the U.S. National Debt Clock . Manufacturing jobs are now 12.8 million, in 2000 there were 17.2 million.
A strong USD has negative effects on EM. See the good article by John M. Mason on the effect on EM.
Against USD strength there are several factors discussed by this writer (see WWS Swiss Financial Consulting on Seeking Alpha).
One can cite: the budget deficit: the huge federal debt of over $30 trillion; the trade balance deficit of over $ 100 billion monthly; and the weaponization of the currency. Some countries are turning away from the USD. The influence of the USD is declining. Russia obviously wants to avoid the American currency. Russia is avoiding the USD.
The fact is that the USD has remained strong and a significant depreciation has not taken place. What has happened is strong dollar inflation. That might signal the beginning of the end of USD dominance. In any case the thesis of this writer has not yet become the new reality in global finance.
The Euro
The Euro has weakened considerably against the USD.
The Euro is practically at par with the USD. The EU economy is not doing so well, and the sanctions against Russia have had a boomerang effect. Energy prices in the EU have increased a lot, putting industry and consumers in difficulty. The Euro might weaken further. It might be useful to look elsewhere for the cause of Euro weakness. The Euro might have weakened because of USD strength driven by Yen weakness.
The Future
The continuance of USD dominance is uncertain. One should not Be Fooled By Recent Strength according to Ruchir Sharma.
It is not clear what effect the introduction of CBDCs ( Central Bank Digital Currencies ) will have on the USD. This remains to be seen.
The great amount of dollar-denominated global debt will continue to create demand for dollars. An interesting development is that China has been loaning large amounts to many countries and has even cancelled debts of some African countries. Whether this will lead to a demand for cancellation of sovereign debt on a global scale is unlikely, but many countries will be wary of contracting USD debt because the greenback has been weaponized (see above).
Everything considered the future for the USD looks bleak even if at present it seems that the US is the best bet for harboring cash. It is not clear how much longer this is going to be the case. What is clear is that a weaker USD would wreak havoc on American households because imported goods would be much more expensive. With inflation at its current rate, American workers would suffer if the currency should weaken. As things are, with a strong USD, outsourcing is still interesting for corporations, and that means fewer manufacturing jobs for American workers. That might not seem a problem since there are now almost two job openings for every unemployed person if one accepts the BLS statistics. With such a tight labor market, prospects for a diminishing rate of inflation are not favorable. We can expect a lot more inflation, and that will not promote trust in the USD.
The Bottom Line
The conclusion for investors is that it is uncertain when the USD will undergo significant depreciation. It is not a question of "if" but of "when". Diversification into other investments abroad can wait. The Swiss franc seems to be one of the best candidates.
The most pressing problem at the present time, however, is inflation. Investors should take all steps possible to protect their wealth against inflation. Bonds are not the best investment in an inflationary environment. Real estate helps, but one must be careful. Single homes are suffering from lower prices due to higher mortgage rates. Shopping malls and office space are a bit risky. Right now REITs concentrating on residential rentals are doing well.
Of course precious metals are a traditional hedge against inflation. Physical gold is a good bet. There are expenses involved but gold ETFs could cause problems if pressed for redemption in physical gold. Silver at present is extremely inexpensive. Uranium has become much more interesting of late because of Russian sanctions. Uranium stocks have much to recommend them. In any case inflation is the primary worry for investors.
For further details see:
Strong Dollar Vs. Weak Euro