Dollar value drops 9% as economy declines; gold hits record highs
Even the greenback looks a bit green these days due to the COVID-19 pandemic.
Battered by a global recession and investors fear the U.S. economy is facing a particularly tough time, the U.S. dollar has fallen 9% from its March high and is on course for its worst July. since summer 2011.
In contrast, gold – long considered a safe haven for investors in times of turmoil – has been setting price records in recent days. It hit a new closing high of $1,931 an ounce on Wall Street on Monday. Given the global uncertainties, gold could rise another $1,000 an ounce in the coming months, according to analysts at Bank of America Global Research.
The dollar is down about 3% for all of 2020 after rising in each of the past two years in step with the US economy. Over the past three months, however, the dollar has fallen 5.1%.
“The dollar is very vulnerable now,” Boris Schlossberg, managing director of G-10 currency strategy at BK Asset Management, told financial publication MarketWatch last week.
The falling dollar is a two-way street for the Trump administration as it seeks to revive an economy devastated by pandemic-related shutdowns. Imports become more expensive, but a weaker dollar makes US exports more competitive abroad. President Trump’s focus on US trade balances and the trade deficit with rivals such as China could be helped by a weaker dollar.
But the decline has also sparked rumors that the US dollar’s privileged position as the world’s “reserve” currency could be seriously challenged for the first time since the end of World War II.
“Massive [government] spending and the general unattractiveness of the US dollar could be … more of a threat to the dollar than people appreciate,” Schlossberg said.
An analysis by Goldman Sachs this week has sparked speculation about the dollar’s long-term ability to remain the world’s undisputed reserve currency.
As the Federal Reserve prints dollars to stimulate the economy and lawmakers on Capitol Hill debate trillions of additional dollars in fiscal support, “real concerns about the longevity of the U.S. dollar as a reserve currency have begun. to emerge,” according to Goldman Sachs’ analysis. warned.
“Gold is the currency of last resort, especially in an environment like the current one where governments are depreciating their fiat currencies and pushing real interest rates to historic lows.”
“The resulting expanded balance sheets and vast monetary creation stimulate [dollar] fears of debasement,” Goldman strategists said.
Some argue that the tensions exposed by the pandemic could encourage policymakers to rethink the value for the United States of being the world’s de facto backup banker.
Past predictions of a falling dollar have not borne out, but economists Simon Tilford and Hans Kundnani, writing this week in Foreign Affairs, say that with “exorbitant privilege” comes an “exorbitant burden” that Washington could soon no longer want to bear.
“Even though much of the rest of the world wants the United States to maintain the dollar’s role as a reserve currency – just as much of the world wants the United States to continue to provide security – Washington could decide he can’t afford to do it anymore,” they wrote.
The dollar’s long dominance, they add, has helped US banks and capital markets, but hurt manufacturers and workers in high-industry states – a key part of Mr. Trump’s economic agenda.
“Given these growing economic and political pressures, it will become increasingly difficult for the United States to create more balanced and equitable growth while remaining the destination of choice for global excess capital, with the overvalued currency and deindustrialization entails,” Mr Tilford said. and Mr. Kundnani say. “At some point, the United States may have no choice but to limit capital imports in the interests of the broader economy – even if that means voluntarily renouncing the role of the dollar in as the world’s dominant reserve currency.”
The Trump administration is betting on a faster-than-expected rebound in the U.S. economy as a whole, which could bolster confidence in the dollar. The Federal Reserve’s policy statement on Wednesday and the impending employment numbers report should provide some insight into the future of the dollar.