📉 Dollar Falling in Value 📉
The USD index has been on the decline over the past 2 years. In fact, it is down by over 10% since the beginning of March last year. It comes down to one of the most fundamental economic disciplines of all – supply and demand. What is clear from this then is that there has been an oversupply of dollars on the open market with a demand that has not been able to keep up with it. So, when viewed in that context, it makes perfect sense as to why the dollar index is on the decline. There has been a rapid decline in US economic activity from the pandemic. This has meant that natural “utility” demand for dollars has been on the decline.
🤝 Trade Deficit 🤝
When it comes to the US, they run a pretty large deficit of close to $540 billion. This has deteriorated even more since the beginning of the pandemic. If people in the US are importing more goods and services from abroad than they are going to be paying for in US dollars it means that those exporting to these consumers will have to convert that USD into their local currency in order to meet their expenses. And, this is just the ‘goods’ component of the trade deficit. You should also consider the capital component. Given that there has been an explosion in government spending and a lack of domestic saving, the US has to import surplus saving from abroad if it wants to invest and grow. The US budget deficit is now so steep that I somehow think it will be hard for them to save domestically any time soon. They will have to import those savings and investments.
💸 Money Printing 💸
There has been a lot of money printing going on. Oversupply with limited demand of course decreases it’s value. This is not only for purchasing power (inflation) but also it’s value relative to other currencies (depreciation). In a recent virtual summit, Powell stated that monetary stimulus will remain in place well into the recovery. Given that the recovery seems to have stalled more recently, one can therefore assume that the printing presses won’t be slowed anytime soon. Currently, the Fed is buying $120 billion of treasuries and mortgage backed securities every month. $120 billion of extra funds that are likely to continue for the next few months.
🤔 No Longer Reserve Currency? 🤔
As other countries have sought to limit their reliance on the US dollar, so too has it’s global use waned. For example, in October last year the Euro exceeded the dollar as the most used currency for global payments – something that has not happened for years. Both Russia and China have signalled that they would like to move away from their dependence of US dollar settlement – and this was even before the pandemic and tumultous geo politics of the past year. We also have to consider that the share of USD in terms of central bank reserve holdings is on the decline. This means that there is less demand to hold dollars by these banks and hence the price is likely to reflect that.
📜 Disclaimer 📜
The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading Forex, cryptocurrencies and CFDs poses considerable risk of loss. The speaker does not guarantee any particular outcome.