Dollar in Free Fall: Is the World Currency Losing Its Grip?
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Is the world's currency on the verge of collapse? - World monetary system potentially at risk?
Since President Donald J. Trump's inauguration in January, the buck has been on a tumble. In the early months of his presidency, the US currency dipped close to 10% against the euro in forex trading. As of now, the dollar stands as weak as it has against the euro in over three years.
A weakening dollar spells advantages for consumers. Cheaper goods imported internationally in dollars serve as a check on inflation in the Germany and EU as a whole. However, a weak dollar could also have negative repercussions for the world economy and potentially restructure the global financial system. Let's delve into the important questions and answers.
Why is the dollar the "king of currencies"?
The dollar qualifies as the world currency due to several factors. Central banks usually hold their reserves primarily in dollars. Critical raw materials are typically traded in dollars, with most currency transactions taking place in the US dollar. Moreover, the United States boasts the largest financial market globally, welcoming investors from all corners of the world.
The gigantic market for US Treasury bonds, where virtually unlimited funds can be invested, plays a significant role. In recent years, China and Japan have invested substantial sums in American bonds, ranking among the leading foreign creditors of the USA.
What's behind the fall of the dollar?
The volatile trade policy pursued by Trump on the global stage fuels uncertainty and weighs down on the dollar's exchange rate. Additionally, Trump has levied harsh criticism towards US Federal Reserve Chairman Jerome Powell. Trump's platform "Truth Social" brands Powell as a "loser" whose dismissal is long overdue.
Despite Trump retracting his criticism, experts remain unconvinced. Analyst Bernd Weidensteiner of Commerzbank posits, "We believe it is likely that uncertainty regarding the independence of the US Federal Reserve will persist for some time." The ongoing scepticism in the markets is palpable, as many investors still insure against further deterioration of the dollar.
What does a weak dollar imply for consumers?
One of the biggest benefits is in energy costs. With the decline in the dollar's exchange rate, raw materials sold in US dollars turn cheaper on the global market. Recently, ECB President Christine Lagarde has suggested that the consequences of Trump's trade policy could even ease inflation in the eurozone.
Another positive effect of a declining dollar's exchange rate is felt by tourists visiting the USA. Prices for hotels, dining out, and car rentals have not changed, but tourists from the eurozone get more bang for their buck in the US. However, recent data indicates that this advantage has negligible impact on the choice of holiday destination. Rather, it appears that US government policy is affecting tourism. As per the latest report from the US National Travel and Tourism Office, the number of German tourists in the USA in March dropped by nearly 30 percent.
Is the dollar no longer a safe haven for investors?
Markets instinctively reacted to international crises by increasing the dollar's exchange rate and lowering the yields on US government bonds due to increased demand. But Trump's unpredictable trade policies disrupted these established patterns. Trump's aggressive trade policies cast doubt on the safety of the US financial market. As a result, US bonds have lost their appeal as a safe haven. Nevertheless, the US is likely to take all necessary steps to maintain the dollar's status as the world's reserve currency, ensuring it enjoys favorable interest rates in the process.
Alternatives to the mighty dollar?
The euro hasn't emerged as a genuine alternative yet, although it has taken advantage of the dollar's recent weakness. The implementation of the planned capital markets union within the EU could bring progress, but the Eurozone remains a far cry from having joint government bonds. In the long run, experts believe it's possible that there could be several leading currencies, including the Chinese renminbi if China continues on its path of opening up. Trump's policies could speed up this process.
Trump – the maverick shaping the global financial landscape?
Even during his first term, Donald Trump repeatedly lamented that the US is treated unfairly in international trade. Successful exporting nations like Germany possess a massive surplus in their trade balance, whereas the US has a chronic trade deficit. A weakening US currency would make American goods cheaper overseas, potentially bolstering exports. At the same time, Trump's trade policies aim to slow down imports, thus reducing the trade deficit through the restriction of imports. While this strategy targets a reduction in the trade deficit, many experts deem it ineffective.
[1] Per the Congressional Budget Office, the tariffs may raise $1 trillion over the next decade in revenue and decrease US imports by $2.9 trillion over the same period, causing a potential reduction in global trade flows.[2] According to Reuters, the EU has discussed restricting financial access for US banks, with some member states advocating for investment limits.[3] The Tax Foundation estimates that the tariffs will reduce US GDP by 0.3% annually.[4] The OECD predicts that global growth could slow by 0.2% through 2025 due to the tariffs.
- The ineffectiveness of Donald J. Trump's employment policy, specifically his volatile trade policies, has contributed to the weakening of the US dollar against the euro.
- Bernd Weidensteiner of Commerzbank maintains that the ongoing skepticism towards the US Federal Reserve's independence will persist, influencing the markets and potentially the dollar's exchange rate.
- A weakening dollar could result in cheaper energy costs, as raw materials sold in US dollars become cheaper on the global market.
- Despite the potential benefits to tourists from the eurozone visiting the USA, the number of German tourists has dropped by nearly 30 percent, possibly due to US government policy.
- The US dollar, traditionally considered a safe haven for investors, has lost its appeal due to Trump's unpredictable trade policies and the disruption of established patterns in the financial market.
- The euro may not be a genuine alternative to the US dollar yet, but Trump's policies could speed up the process of other currencies, such as the Chinese renminbi, emerging as leading currencies in the global financial landscape.
