The Demise of the US Dollar

US President Donald Trump has tweeted about the US market every single week since July 2017.

In his view, the impressive 24% and 23% gains in the Dow Jones and the S&P 500 respectively are all down to him. However, the US bull market really began in 2009, eight years before Trump came into power.

That said, there’s no doubt his US$1.5 trillion (AU$1.86 trillion) tax cuts are boosting the US markets at present. With the corporate tax rate now officially down from 35% to 21%, chances are there are still one or two big rallies yet to come.

On the back of rising stocks is the curious case of the weaker US dollar. The US is, statistically speaking, running at full employment, with an unemployment rate of 4.1%. Gross domestic product was 3.3% last year.

Moreover, the US Federal Reserve Bank is raising rates. In two years, the cash rate has moved from 0.50% to 1.50%. And markets expect at least two more rate increases this year.

All these factors traditionally go with a healthy economy, and tend to support a strong currency.

Yet, since Trump took over the White House in January last year, the US dollar has rapidly lost value against other major currencies. In the space of a year, the US dollar is almost 14% lower against both the euro and pound sterling.

The greenback is down 4.49% against the Japanese yen, 5.67% against the Swiss franc, and 6.97% against the Aussie dollar.

What’s more, somehow, the US dollar is down 7.4% against the Chinese yuan — no mean feat given how heavily managed the yuan is by Chinese authorities.

In decades past, big declines in the US dollar didn’t matter. After all, this was ‘King Dollar’. The world’s primary reserve currency. That status alone acted as an airbag protecting the US dollar.

Today, bigger things are happening to the greenback. More countries are questioning — even challenging — its dominance. 

Trump continues to take all the glory for the US stock market. Yet he’s ignoring the value of the almighty dollar falling on his watch.

A weak currency can boost manufacturing, as an example — something Trump will claim as his doing no doubt. Yet the end result will be the loss of privilege the US dollar currently enjoys.

Being the primary reserve currency enables the US government to print its way into and out of problems.

Want to invade a country? No problems. Turn the printing press on and pump out trillions to fund the invasion.

Stock markets and housing bubbles bursting and making a mess? Oops. Never mind. Put some more paper in the printer. We’ll start ‘loaning’ this new imaginary money out to keep everything going.

Every major commodity is priced in US dollars. To top that off, Bloomberg says the US dollar is the most used currency in the world, accounting for 40% of all global transactions.

That said, while the big falls may be happening under Trump’s leadership, there’s nothing he can do to stop it.

US dollar likely to continue falling

For now, the US dollar is likely to fall further against the euro as the Eurozone starts to show healthy economic growth. And rising commodity prices should keep the Aussie dollar up — and the greenback down — for now.

Overall, the US dollar is heading south it seems. And perhaps in less than a decade, it won’t be King Dollar, but just another buck floating through the financial system.

One of the biggest signals this shift was underway came last year. Chinese authorities said they would start offering oil futures contract priced in yuan. However, if other trading parties — mainly Russia and Saudi Arabia — didn’t want yuan for the oil, the Chinese cleverly offered to settle the contracts with physical gold.

One precious commodity for another, bypassing the US dollar entirely.

Head of FX strategy at Saxo Bank John Hardy last year called the US dollar ‘increasingly dysfunctional’. Hardy says that China’s increasing autonomy in the realm of financial transactions was showing the US it didn’t need its printed money.

He notes:

China is eyeing the benefits of having its own currency play a larger role and to supplant the USD’s role in global trade. The initial focus is on the global oil trade, where it has announced the intention of buying oil in yuan and allowing trade partners to settle that yuan in gold.

A Forbes article earlier this month suggested there were under-the-table charts about euro-yuan trades occurring in the future. Negotiations are in the early stages. But with the Eurozone and euro strengthening, greenback dominance no longer makes much sense.

Right now, only the small falls in the dollar are visible.

But the power, purpose and position of the greenback is under threat. The world’s biggest money machine looks like it’s on its last legs. It’s just a matter of time before the unthinkable happens.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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