The dominant position of the US monetary unit will only worsen the economic consequences of the pandemic, the IMF concluded. At the same time, trillions of dollars that were printed to fight the crisis, and ultra-low rates are undermining the reserve currency itself: investors are fleeing the US national debt.
The detriment of the trade
Faced with an unprecedented collapse in global demand and commodity prices, capital outflows, supply chain disruptions, and a general decline in global trade, many developing-country currencies sank sharply. As a result, the cost of imports is rising, and demand is falling, according to IMF experts in the report “Dominant currencies and limits of exchange rate flexibility.”
This raised hopes for improving the competitiveness of exports from such countries. However, economists emphasize that it will not be possible to take advantage of the situation to stimulate the economy: export prices are set in dollars.
According to the IMF, the US economy lost 37% in the second quarter. This is although, since March, the Federal government has poured a massive amount into the markets — about six trillion dollars. At the end of the year, GDP is expected to fall by 6.6%, “despite unprecedented support measures.”
Experts warn that the effect of aggressive Federal reserve stimulus may be harmful. Financiers talk about a” historical experiment”: the printing press is running at full capacity, providing an influx of unsecured cash. And this is slowly killing the dollar.
“The government is responsible for the value of the currency it issues. Otherwise, confidence in it is undermined, ” – points out the former head of the fed, Paul Volcker.
“After a few trillions of freshly printed dollars are thrown into the economy, people start to think that it’s all just nonsense,” said Jared Dillian, investment strategist at Mauldin Economics.
Against the backdrop of an attraction of unprecedented generosity and with interest rates at historic lows — that is, at zero — the most significant investors are fleeing US government bonds.
“If a bond doesn’t yield an interest rate or generates a negative one, and issuers produce a lot of currency, why do you need this bond?” says Ray Dalio, a billionaire and founder of the world’s largest investment Fund, Bridgewater Associates.
Meanwhile, the sale of government bonds is the primary source of funding for the US budget deficit, which has already reached almost three trillion dollars.
Stephen Roach, a well-known economist and former head of the Asian division of investment bank Morgan Stanley, spoke about the pressure on the US currency of budget and debt problems. In his opinion, the dollar still enjoys “exorbitant privileges,” but its era is coming to an end.
In 2021, the financier predicts, the American monetary unit may devalue by a third. This will lead to a sharp reduction in household savings and an increase in public debt against the backdrop of a successful exit from the crisis of the leading US trading partners.
Roach stressed that there are growing doubts in the world about the once-recognized exclusivity of the dollar. “Currencies establish a balance between a country’s internal economic base and external perceptions of its strength or weakness,” he recalls. — In the US, that balance is changing rapidly, so a crash is likely soon.”
Now, according to the Bank for international settlements, the dollar is quoted at 33% above the lows of 2011. But in 2021, it can quickly return to these lows, having weakened by 35% when adjusted for inflation.
“Any exchange rate is a relative price that reflects the state of a country — economic, financial, social, and political — in terms of the same characteristics of other countries,” explains Stephen Roach. The forecast of a 35% decline in the value of the dollar is based on a comparison of America with its main trading partners.”
An additional risk is ultra-low interest rates. This ultra-loose monetary policy, combined with large government borrowing, will exacerbate “significant macroeconomic imbalances,” inevitably hitting the dollar.