economics
Is the Dollar’s Status in Jeopardy?
Economics, Yale University
President, Rosenberg Research
0
0
Genesis
Response
Penultimate
Finale
June 24th, 2020
Responding to your three-pronged argument:
1. First, it is completely normal for the reserve currency country to be running current account deficits. The key really is the extent to which foreigners are willing to fund the balance of payments shortfall at the prevailing exchange rate. The ultimate driver of any currency is the basic balance, or the current account requirement net of long-term capital inflows. I see no evidence here that there is trouble brewing for the USD.
2. All of what you say about America's global leadership position being tarnished is true, but November is likely to bring the winds of political change. Think of what the world thought of America during the Carter years and then what happened after November 1980.
3. When the euro was launched in 1999, all I heard was how the new kid in town was going to challenge the US dollar for reserve currency status. Here we are, more than two decades later, and we hear the same old refrain. Remember, at the launch, the euro’s IPO price was $1.18. Today, it is $1.12. Nice challenge. Some now say it will be China. Sure... A country with no property rights or transparency. Don’t think so. History is clear on this from the Dutch to the British to the United States of America: The country with the most powerful army and navy is the country that will have the world reserve currency status. If that ever changes, it will be well after Steve and I leave this earth, and I wish us both very long lives.
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The way I see currencies is that they are a relative pair trade. Against gold, with its stability characteristics, I don't like the US dollar. But despite all the warts, pimples, and scars on the greenback, I think most other countries have far deeper problems.
Believe me, I live in Canada, and we just got an outright ratings downgrade to AA+ from AAA and there is more to come. And the national balance sheet north of the border is far more stretched, and Canada incurred a consumer debt and housing market bubble this past cycle that was so dramatic it exceeded the peaks of what we saw in the 2003-07 U.S. credit bubble. Even Alan Greenspan would be blushing.
It's next to impossible for me to be building any bullish view on the Sterling or the euro as the UK and EU stumble towards their divorce and the bottom line is that much of Europe is replete with zombie banks, especially in Italy. You own the euro, you're staking a claim in insolvent Italian banks. No thanks.
Maybe there's a case for the Emerging Market FX complex or the commodity currencies, but for that to happen we need vigorous synchronized global growth, and that simply isn't in the cards for a long time.
The yen and Swiss franc may act as safe-havens but wouldn't be enough to drag the trade-weighted dollar index lower for any length of time. The way I see it, if you're a fixed-income investor seeking safety or duration, you can go to a 0% long bond or a 1.5% long Treasury. And we can't deny that if you're an equity investor looking for growth in a world devoid of it, then one has to consider that two-thirds of the world's largest 50 stocks are US companies and mostly in those 'growthy' areas of technology, health care, and brand-name consumer staples.
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