The recent US dollar depreciation has been significant, with the greenback suffering its worst month in a decade. In the last three months, the US dollar index is down 6.03%.

Demand for safe-haven currency, in March, was spurred on by a pandemic. Moreover, the pandemic’s disruption to the global economy continues, which is stoking demand for risk-off assets. There is talk of a so-called second wave and future lockdowns, global travel restrictions and quarantine disruptions continue to wreak havoc on global travel and related industries.

US Dollar Depreciation
US dollar index is down 6.03%

“the US dollar index is down 6.03%”


Why the recent US dollar depreciation in a current risk-off environment?

Surprisingly, the sharp US dollar depreciation escaped mainstream attention, until a recent piece entitled, “Dollar blues: why the pandemic is testing confidence in the US currency” in the FT.

So again, US dollar trajectory and the debate about whether the dollar’s role as a world reserve currency continues to be a hot button topic. If investors can forecast the US dollar, then they are more likely to get the rest of their portfolio right, bearing in mind that the US dollar influences everything from the competitiveness of US exports, the cost of basic inputs, and Emerging Markets ability to service $3.74 trillion in dollar debt.

Investors can forecast the US dollar

“If investors can forecast the US dollar, then they are more likely to get the rest of their portfolio right”


Back in March, COVID-19 and the great global lockdowns which ensued triggered the worst economic crash ever recorded; it was the pin that pricked the stock bubble, which sent stock prices into a freefall. 

But demand for US dollars with its safe-haven currency status sent the US dollar index shooting upwards.

Desperate for safety, in need of a currency with a good store of value and to keep business functioning through in an economic crisis investors bought US dollars, which also created a US-dollar melt-up.

The scale of the dollar rally, 9 percent in as many days was both extreme and predictable.

In a crisis, a dollar rally always plays out. There is a pattern of a dollar rally which unfolded in the previous 2008-09 financial crisis and every geopolitical flareup spanning a decade. So as the saying goes, “when the system breaks, then the dollar rallies,” did indeed prove to be correct in March.

“If there is turmoil you want safety” – Eswar Prasad

“If there is turmoil you want safety” said Eswar Prasad, an academic at Cornwell University and a former senior IMF official. 

The recent US dollar depreciation could be spurred on by investor fears of the deteriorating state of the domestic economy

Bearing in mind that the US GDP suffered its worst 32.9% economic contraction ever recorded.

Nevertheless, the post-pandemic economy isn’t much better in other larger economies with Germany’s GDP dropping the worst since the 70s and across the Channel, the Bank of England is predicting the worst economic crash for the UK economy in 300 years. 

Why the US dollar depreciation, which amounted to a five percent drop in the value of the dollar in July, according to the US dollar index?

Some argue that the US dollar depreciation marks the beginning of the end of US dollar hegemony. 

But that is not the case, the world has not decisively shifted away from the US dollar. Dollars supremacy continues, the US dollar is a juggernaut in global trade with nearly a fifth of all trade deals outside the US invoiced in the currency. Most of the world’s valuable commodities are priced in US dollars.

Moreover, in the $6.6 trillion daily currency market, 88% of deals are traded against the greenback, according to the Bank for International Settlements. This limits central banks’ ability to diversify from US dollars. 

Furthermore, there is no alternative to the US dollar.

China is no longer perceived to be the biggest threat to US dollar dominance since its financial system remains subject to capital flow restrictions, therefore the renminbi cannot play the part of the global reserve currency. 

“climate change is already impacting global wheat production, which is having an upward impact on wheat prices” – Wealth Training Company

Could the dollar depreciation be due to the rise of the euro? 

Some argue that US institutions are now too weak and that the rise of the euro is taking off. But based on the currency composition of official foreign exchange reserves from 2004-2019 the euro has been in the low 20 percent ever since the European sovereign debt crisis. 

More than 60% of the world’s reserves are held in US dollars. 

We don’t believe the dollar depreciation is due to the rise of the euro

Brad Setser, a former US Treasury official now at the Council on Foreign Relations, said,  it is “far fetched” to believe that the euro will suddenly supplant the dollar. 

One likely reason for the recent dollar depreciation is “US mismanagement” whether it be the Fed’s unprecedented monetary easing policy or the ballooning near one trillion US dollar fiscal deficit.

The Fed’s ratcheting up of quantitative easing QE, creating currency to purchase assets in the wake of the 2020 pandemic stock market crash is debasing the world’s reserve currency and sending bond yields tumbling. US treasury yields are currently at 0.54% and the Fed fund target rate is between 0.00 and 0.25%

Put simply, the recent dollar depreciation could be due to low returns of cash deposit accounts and dismal treasury yields, which is causing a spike in demand for alternative safe-haven assets, precious metals

The great gold rally has its origins in US mismanagement, which could be slowly chipping away at the dollar’s standing. Dominance leads to complacency, mismanagement, and an eventual decline.

Despite the recent US dollar depreciation hegemony still rules and any opportunity to load up on cheap US dollars could play at well going forward With no alternative, the US dollar can easily shake off any policy errors. 

Another reason for the recent dollar depreciation is that perhaps it was engineered by policymakers as part of the global recovery

World debts and trades in US dollars. So, dollar depreciation is a stimulus for business with dollar-denominated debts, particularly for emerging economies. Also, the world’s valuable commodities are priced in US dollars. So, a US dollar devaluation reduces input costs and the cost of servicing US dollar-denominated debt for those outside the US, which is also a tailwind for the global economy.

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