Dire Predictions

Pundits and some economists have been writing about the possible demise of the US dollar for years. Many of these articles are alarmist in tone and have titles like “The Coming Global Collapse” and most are based on speculation. Despite these dire predictions investors and traders remain unalarmed. Some analysts believe that a sharp drop in the dollar or market volatility could create a crisis of confidence in the US dollar and its role as a global reserve currency.

US Deficits Cause Concern

Some investors are concerned about the United State’s ability to fund massive deficits and some nations, most notably China, have expressed concern about the sustainability of the dollar’s reserve currency role in global economics.  Rising stocks and well received auctions of US Treasuries suggest that most investors have confidence in the dollar. The US dollar has fallen 15% against a basket of six major currencies since March and has fallen over 37% from a 2001 high.

US to Keep Rates Low for ‘Extended Period’

The dollar vs. euro exchange rate has been steady with the euro hovering in the vicinity of $1.50, down 6% against a record euro high of $1.6040 in March 2008. Michael Woolfolk of BNY Mellon said, “If we breach $1.60. I think that’s too far, too fast and could cause concern about a dollar demise.” Low US interest rates have contributed to the dollar’s weakness and recently investors and currency traders have been using the weak dollar to fund carry trades. Most economists expect the US Federal Reserve to keep rates low for an extended period. At this weekend’s G 20 summit the International Monetary Fund warned against withdrawing stimulus policies ‘too soon.’

Weak Dollar Good for US Exports

In the US the weak dollar is looked at positive for boosting US exports even though the current Obama administration gives lip service to a strong dollar policy. Some economists warn that a weak dollar could cause a flight from US assets leading to an unhealthy rise in interest rates.