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Analysis News:::2020-08-07

End of US dollar hegemony


The US dollar has long been a dominant reserve currency and a symbol of reliability and economic prosperity. However, this is already in the past. The era of the US dollar is over. Due to the coronavirus pandemic, household incomes have plummeted and the US national debt has risen. Moreover, now China claims to be the leading economy in the world. It is not surprising since it was China that first emerged from quarantine and resumed the work of its economy. In this regard, many economists predict a collapse of the US dollar. For example, the eminent economist Stephen Roach is confident that the American currency will collapse by 30-35% very soon.

For a very long time, the dollar was the world's leading currency. Its dominant position strengthened after the First World War thanks to US military superiority. However, in the early 2000s, there was a long-term tendency towards a weakening of the American currency, which is still observed today.

Indeed, July 2020 was the worst month for the US dollar in the past 10 years. It collapsed to multi-year lows. In just a month, the greenback lost six percent against the pound, five percent against the euro, and four percent against the Swiss franc and the Australian dollar.

The COVID-19 pandemic has clearly exposed the long-standing problems of the United States which have been accumulating for many years. So, the crisis became a catalyst for their development. The US economy is now facing a growing budget deficit, recession, and the risk of deflation.

Since there were no personal savings in the country for a "rainy day", and the economy had to be rescued, the American resorted to investments from outside, which led to a record national debt. Market participants have actively invested in the US dollar because of its special role in the global economy. However, now investors do not trust the US dollar due to the growing government deficit.

The US government spends trillions of dollars to support businesses and the population, but this is not enough. According to some reports, the US GDP fell by 32.9% compared to the same period last year.

Also the dollar is under pressure due to Donald Trump's policy. The American leader does not support globalization and seeks to distance from the other countries. America may soon lose its status as the world's leading economy and financial center.

This process has already begun as traders are actively investing in gold for fear of a military conflict between the United States and China. The founder and director of APS Asset Management Pte Kok Hoi Wong believes that it is time to withdraw money from American securities. The expert thinks that during the US presidential elections, political tensions may peak.

The US dollar is now losing ground against its main competitor, the Chinese yuan. While the pandemic is raging through the United States and the number of infected people is rapidly rising, China's economy has quickly recovered from the virus. In addition, the Chinese economy, according to the experts, is undergoing a stage of transformation from industrial to post-industrial. This means that China will focus on the domestic market and will be less dependent on exports. This, in turn, will push the yuan to a new level of a reserve currency.

Mr. Roach has also noted that the increase in oil demand will strengthen the Mexican peso and the Canadian dollar. Moreover, the euro, which has survived all the economic shocks over the past 10 years, has good prospects for further growth. This is enough to crash the US dollar.

At the same time, Charles Biderman, founder of the analytical company TrimTabs Investment Research, sees another danger. At the moment, unemployment in the US is rising, while savings are falling. However, new car sales are increasing, as well as the real estate prices. This signals that instead of saving money, Americans spend it instantly. If the world faces the second wave of coronavirus, the country will face a sharp decline in consumption.

Yet, this is not the worst thing. Stephen Roach noted that the US economy is recovering very slowly, and there are more and more unemployed people in the country. This will lead America into a deep hole of debt as the population has nothing to pay off its loans. The authorities will have no choice but to continue stimulating the economy by investing the next trillions of dollars. Therefore, the budget deficit and dollar depreciation are inevitable.

Former US Secretary of the Treasury Henry Paulson is also confident that the dollar's dominance is coming to an end. The role of the yuan will increase due to the integration of the China's economy into global processes. Indeed, the American currency has faced the most difficult situations in the entire post-war era.

Kate Walter
Analyst InstaForex
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