The US dollar demonstrated a few months ago that it is still the winning horse in the global exchange markets with the beginning of the spread of the Corona epidemic and everyone is scrambling to acquire it in order to seek safety and protection from volatility and uncertainty.

However, the green paper was subjected to a significant decline recently, which prompted many investment banks to expect more suffering for the first reserve currency in the world, and even talk about the end of the era of “expensive concession“.

Up and down scenes

The dollar is like any currency whose performance is measured relative to another currency or group of currencies, i.e. the dollar is said to rise against the euro or decrease against the yen, and therefore there is no absolute rise or decline in the general.

When we talk about the dollar against the major currencies, we mean the dollar index, which measures the performance of the green currency against 6 currencies, namely the euro, sterling, yen, franc, Canadian dollar, and Swedish krona, with the fact that the weight of the single European currency represents more than 57% of the total index.

The index, which was created in 1973 at the level of 100 points, recorded on the twentieth of March 102.9, but it has lost 5% of its value since that time.

One of the main reasons for the rise of the dollar with the start of the brutality of the “Covid-19” epidemic in March was the high global emergency demand for the green currency, which necessitated the Federal Reserve contracting currency deals with several central banks around the world to supply them with the green paper.

It makes sense for the dollar to rise as global demand increases, but in return what do you expect when this hunger subsides?

Samir Gul, chief Asian economist at Deutsche Bank, says the dollar may experience a slump against its counterparts from the currencies of developed countries as the emergency demand for the currency recedes.

Indeed, the Bank of England issued a statement announcing its agreement with three other central banks, namely the European Central Bank and the Bank of Japan and the Swiss Central Bank in order to reduce currency exchange operations with the Federal Reserve to three times per week instead of the daily operations previously carried out due to calm demand and improved dollar financing conditions.

The euro, which has a noticeable relative weight, contributed to the recent drop in the dollar index

 While Goldman Sachs believes that the dollar is likely to drop further in the coming period, perhaps up to 20% of its value recorded in March, against the backdrop of the global economic recovery.

The euro, which has a noticeable relative weight, contributed to the recent drop in the dollar index, after economic data showed a recovery that exceeds expectations for industrial and service activity in the single currency area during June.

The stimulus package of President Donald Trump’s administration, which has approached $ 3 trillion, the expected sharp deficit in the federal budget, and the Fed’s lending facilities, put downward pressure on the dollar.

Even on the health side, the United States is experiencing an acceleration in HIV infection and is the undisputed leader in the list of countries most affected by the epidemic, threatening to halt or slow the gradual return to business of the economy, while on the other side of the Atlantic Ocean, matters in the old continent seem to be improving relatively.

Thus, it appears that the United States, which entered the epidemic crisis after its counterparts in Europe and Asia, will need more time to recover healthily and economically.

GB Morgan Chase also recommended that investors sell the US dollar in favor of the G10 currencies that have a strong current account surplus such as the Swedish krona or the Japanese yen.

So the consensus seems clear that the dollar is likely to see worse performance in the short term, but some go far to talk about the end of the era of the “exorbitant privilege” of the dollar and the start of a new world order.

End of exorbitant privilege?

The dollar arouses the frustration of many people for many years, and comes at the forefront of the most disgraceful French Finance Minister in the sixties of the last century, “Valerie Giscard” who launched the phrase “a high dollar concession” to describe the exploitation of the United States because it has the first reserve currency in the world to increase the welfare of its people at the expense of other countries .

And Valerie pointed out in his famous description that the United States prints the dollar and buys all the goods and services it needs from the rest of the countries at almost negligible cost, with the fact that the world needs the green paper in all its transactions.

However, some recently held that the United States is close to losing this advantage due to economic and political developments after the outbreak.

“The era of the dollar’s franchise as a global reserve currency is nearing the end,” says Stephen Roch, a member of Yale University and former head of Asia unit at Morgan Stanley, seeing his vision for the future of the dollar and the reason for his estimates of a 35% drop in the world’s first reserve currency. 

Roche summarizes his vision that any currency is balanced between two factors: domestic economic fundamentals and a foreign perception of the strength or weakness of this country, but with the Congressional Budget Office’s expectations for a rise in the US budget deficit to 17.9% of GDP this year and estimates of declining domestic savings and expansion The current account deficit, the dollar may be exposed to severe downward pressure.

Old speculation – new

The speculation that the dollar will fall or lose its global position cannot be considered a new matter, as this talk has increased in frequency over the past years.

After the introduction of the euro as the common currency of a number of European countries, there has been continuous speculation about its competition, or even bypassing the dollar in the most widely used currency race within a decade.

 After the global financial crisis and then the sovereign debt crisis in Europe, the conversation turned away from the euro to the Chinese yuan, due to the large size of the country and the impressive economic growth that it has recorded for two consecutive decades, and finally the efforts of the renminbi globalization and spreading its use internationally.

But the reality still indicates that the dollar is the first reserve currency in the world, and despite the decline in its share in the international reserves of central banks to 60.8% at the end of the last quarter of last year compared to 61.5% three months ago, it remains far from the euro, which represents 20.5% and the Chinese yuan That stands at 1.9% of all international reserves.

For any enquires or comment please contact me direct 

Mohamed Shraka

Business Developer
mshraka@tvmarkets.com

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