The U.S. Dollar refers to the official currency of the United States. This is also the world’s largest reserve currency since the end of the Second World War when the American economy was the only one still standing at full productive capacity after the ravaging destruction of the global war left most of Europe and Asia in economic ruin.
The U.S. Dollar value is measurable by three different means. These are exchange rates, foreign exchange reserves, and Treasury notes. The most commonly utilized means of valuing the dollar is by looking at exchange rates. It is important to understand all three measures to know where the future value of the global reserve currency the dollar is headed.
The dollar value has benefited from all three of these metrics of its worth rising since the year 2011. There are several key reasons that explain this. On the one hand, when any worldwide crisis erupts, the dollar becomes the preferred safe haven global primary reserve currency. It is mostly because skittish investors run to the U.S. Treasuries instruments which they perceive to be the safest liquid investments in the world. Despite the fact that this is no longer in fact the best-rated or safest debt in the world, nevertheless investors still run to it according to their longstanding habits since the end of World War II.
Another reason the dollar measurements have continued to gain is because its only real rival in the world (the euro and) the European Union has not been successful at increasing the economic growth even with massive runaway quantitative easing programs. Investors worried in 2012 about the Greek-started Sovereign Debt Crisis in Europe. Both of these problems have discouraged demand for the EU’s euro. It is still a growing second choice as a global currency though.
The Chinese currency the Yuan has not been able to gain much traction as an alternative currency to the dollar because of the slowdown in economic growth there that began in 2015. Both China and fellow Asian economic superpower Japan continuously artificially deflate the values of their currencies by buying dollars. This allows them to make their exports cheaper overseas which is good for their respective economic growth rates.
Finally, there is a perception that U.S. interest rates which the Federal Reserve sets are going to slowly continue increasing while the interest rates in Europe continue to decline. Yet the dollar was not always so strong, nor is its future strength assured. The current strengthening period from 2011 actually reversed the long-term dollar decline that started back in the year 2002.
Three critical pressures all still exist and have not been adequately addressed. In fact they are actually getting worse by the year. This will finally cause the dollar’s longer-term decline to resume over the medium to long range time frame. The biggest drag on the U.S. Dollar is the fact that the American Federal debt now exceeds an eye watering $20 trillion. The foreign debt holders have long been concerned that the Federal Reserve will simply deflate away the value of the dollar so that it will be cheaper to pay back debts that cost less in their own declining dollar currency. Because of this, long-term largest U.S. debt buyers Japan and China have reduced their Treasury purchases in an alarming and worrisome sign of the times.
The long-lasting quantitative easing program of the U.S. in the Global Financial Crisis and Great Recession caused the Federal Government to monetize the debt. This strengthened the dollar and ensured lower interest rates. This is now coming to an end, and investors fear a resume in the dollar’s longer-term decline.
Secondly, because of this massive and growing toxic debt bomb, there is also enormous pressure on both Congress and the American President to reduce spending or increase taxes in the U.S. Either of these actions will impact economic growth in the U.S. negatively.
Finally, as foreign investors like Japan and China have more choices of viable foreign reserve currencies today than ever before, they are naturally prudently diversifying their reserve currency portfolios and investments into non dollar denominated investments and assets. It all spells long-term terminal decline for the U.S. Dollar.