economics
Is the Dollar’s Status in Jeopardy?
Economics, Yale University
President, Rosenberg Research
0
0
Genesis
Response
Penultimate
Finale
June 25th, 2020
Great comeback, Steve, and I don't disagree with your comments. What I am saying is that what drives currencies ultimately is what drives everything in asset and securities markets: confidence. In this case, we are talking about shifts in global investor confidence. The US has been running huge current account deficits for decades. I never found these to be particularly useful inputs into currency determination on their own. It is actually perfectly reasonable for the reserve currency country to be running shortfalls on the trade and payments accounts. Of course, there is always the debate of what drives what — does the current account drive the capital account or the other way around? Either way, the few times the US ran current account surpluses in the past five decades didn't exactly bring with them a bull market in the USD.
The key is the basic balance account. This will tell us if the dollar or any currency will be in a bull, bear or sideways market. The size of the deficit on the current account only becomes a problem if the country in question cannot fund the gap with stable and long-term investment inflows. So I agree that if there is a crisis of confidence in the US, that impairs the inflow of global capital, the greenback will be singing the blues. Yes, yes, the November election is months away and who really knows what will happen. But the problems you highlight are ones that are already known and advertised and should be in the "price" as things stand. The question is what negative surprise there is out there that would cause the US difficulty in meeting its funding needs.
One other matter here that could affect investment flows going forward, actually in favor of the dollar, is what happens post-COVID in terms of the localization of global supply chains. This process, which both parties favor, is going to prompt US-owned operations abroad to relocate back home, at detriment to a lot of Asian and emerging markets economies as these facilities shutter and move home. This is the one area in the future, the near future, that will alter cross-border investment flows and quite possibly trigger a production and capex rebound in the US earlier than expected. Something to consider: the partial retreat of globalization will be a plus for US industrial activity, though consumers will pay for it through higher prices than would otherwise be the case. This, in turn, causes the Fed to tighten policy ahead of everyone else - something else that could trigger dollar appreciation. These are some upside surprise factors, from my view.
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