“ The dollar is our currency, but it’s your problem » said John Bowden Connally, Richard Nixon’s Treasury Secretary. The end of the dollar is an antiphon contradicted by the facts for decades. In recent years, many experts and investors have bet on the decline of the American currency. To justify their prediction, they highlight growing internal political tensions, gargantuan public debt or the temptation of several countries to de-dollarize their economies.
Between January 1 and the end of April, the dollar appreciated by more than 4% against other major currencies. The yen is at its lowest level in 34 years against the dollar. The euro fell below $1.07 from $1.10 at the start of the year. The strong growth of recent quarters and the role of the United States as a safe haven have overcome the birds of ill omen.
The strength of the economy, an asset for the dollar and vice versa
At the end of 2023, US GDP was 8% higher than at the end of 2019. Those of the United Kingdom, France, Germany and Japan grew by less than 1.7%. Foreign capital is attracted by the vitality of the American economy and high interest rates. The dollar remains the reserve currency par excellence (60% of reserves in dollars, compared to 20% in euros). De-dollarization remains a question of principle. Even Russian oligarchs continue to acquire dollars using multiple shell companies. The role of the dollar allows the United States to support a significant deficit in the current account balance, filled by capital inflows. The rise in the dollar reduces the cost of imports and consequently inflation, which remains above the 2% target.
The appreciation of the dollar, on the other hand, has destabilizing effects for emerging and developing countries indebted in this currency. It increases the cost of capital and interest repayments, with the latter also increasing. The IMF stressed that the rise in the dollar was likely to cause financial tensions in many countries.
Is a depreciation of the dollar possible?
International coordination could be imagined in order to influence the price of the dollar. Japan currently has $1.3 trillion, India has $643 billion, and South Korea has $419 billion. On April 16, the finance ministers of the United States, Japan and South Korea published a joint statement expressing their concern about the fall of the yen and the won. Joint sales of foreign exchange reserves could be carried out to prevent the two Asian currencies from weakening further. The problem is that assets in dollars are more profitable than those in yen or won. The rate on 10-year US bonds exceeds 4%, compared to 0.8% for the equivalent rate in Japan.
Candidate Donald Trump is campaigning against the maintenance of a strong dollar which is considered responsible for the imposing trade deficit. It would penalize American exports and encourage imports. To this end, the Republican candidate intends to call into question the independence of the central bank and lower key rates as quickly as possible. This decline would reduce the value of the dollar and reduce the costs of repaying loans taken out by businesses as well as households.
Furthermore, Donald Trump wants to increase customs duties on imports, which could harm the dollar. For his part, Joe Biden has not yet mentioned what his intentions were in monetary matters.
American officials criticize China for lowering its currency in order to promote its exports and thus compensate for sluggish internal demand. The yuan has weakened steadily against the dollar since the start of the year. The dollar rose from 7.18 yuan to 7.25 and according to Bank of America, it could reach 7.45 by September. The yuan could be at its weakest level since 2007.
This depreciation of the Chinese currency encourages the leaders of the United States and those of Europe to adopt protectionist measures to slow down exports of electric vehicles in particular. China could even be placed on the US list of currency manipulators.
As long as the American economy remains dynamic, the dollar will remain strong. The growth gap is such within the OECD that the United States attracts capital and researchers from around the world, which strengthens its competitiveness. The tightening of monetary policy had little effect on demand and job creation.
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