Last month, a Bloomberg analysis said that the Fed’s decision to reduce interest rates to rock bottom levels helped wipe out the dollar’s advantage against the euro and the yuan, the currency sliding to its lowest valuation in 27 months while Congress is stuck in gridlock on a stimulus bill aimed at reducing the economic fallout from COVID-19.
The US dollar could drop by up to 36 percent against the euro in the coming year or so, Ulf Lindahl, chief investment officer at A.G. Bisset, a hedge fund specializing in currency management, predicts.
Lindahl pointed to the US currency’s tendency to jump and drop in relation to other currencies in 15 year cycles, and suggested that the recent slowing of the currency’s drop is “really an opportunity to get out of the dollar.”
The US currency already dropped about 11 percent from its 2020 peak against a basket of other major currencies in recent months, with hedge fund bets against the dollar reported to have hit their highest levels in a decade in August.
In January, the exchange rate was 1.12 dollars per euro, but has since dropped to 1.18 in Thursday morning trading in the US.
Goldman expects the dollar’s drop to continue over the coming three years, reaching $1.3 per euro by 2023, a drop of about 28 percent.
Experts at TD Securities have echoed these sentiments, estimating that the dollar is presently about 10 percent overvalued against other major currencies.
Some observers speculate that the dollar’s fall may lead to the currency losing its luster as the de-facto world reserve currency. Toroso Investments/ATAC Rotation Fund portfolio manager Michael Gayed said “there’s been a lot of speculation these days” on that subject.
However, Rick Rieder, global chief investment officer of fixed income at BlackRock Inc, the world’s largest asset manager, believes the dollar’s drop will be less dramatic, telling Reuters that other countries are still too dependent on the currency for trade for it to crash.
Last month, former International Monetary Fund deputy managing director Zhu Min said that the real concern “isn’t whether the US dollar will see an accumulated decline of 30 percent in the future, but whether there will be a blow-up event that causes a sudden loss of confidence in the US dollar, and its market to collapse.”
Most countries continue to depend on the dollar, and to a lesser extent the euro, for trade in everything from commodities to industrial, agricultural goods and intellectual property, with nearly all oil-exporting nations pricing oil in US dollars on the international market. For many decades, this has allowed the US to buy actual physical goods and commodities in exchange for their paper money, and avoid the traditional negative effects associated with large scale printing of money, such as inflation and currency collapse.
However, in recent years, some countries, including China, India, Russia, Iran and Turkey have moved to increase trade in their national currencies.
Last month, an analysis by Nikkei Asian Review found that less than half of all transactions between Russia and China were made in dollars in the first three months of 2020, with 30 percent denominated in euros and the remaining 24 percent carried in yuans and rubles.
Earlier this year, Russian Foreign Minister Sergei Lavrov confirmed that Russia would continue its “policy aimed at the gradual de-dollarization of the economy,” and suggest that “de-pegging from the dollar in mutual settlements is an objective response to the unpredictability of US economic policy and the outright abuse by Washington of the dollar’s status as a world reserve currency.”
Once one of the largest investors in dollars and US treasuries, Moscow gradually shed almost all of its US debt holdings over the past decade or so, exchanging them for gold, yuan, euros and other currencies in its $500+ billion reserve cushion. Russian energy giant Rosneft dropped the dollar in favour of euros in export contracts in late 2019.
Iran, which switched from dollars to the euro as its official trade currency in 2018, has recently proposed using the combined power of the Non-Aligned Movement (NAM) to put pressure on the dollar’s status in international trade amid Washington’s spate of sanctions against its adversaries.