If anything defines American power, it’s the US dollar. Global credit and debt are typically denominated in US dollars. When the US dollar starts looking queasy, there’s a bumpy ride ahead.
The current news for the US dollar isn’t great. The tariff wars haven’t helped at all. The US market is a major conduit of global trade. The economy depends on that trade. The US economy also underpins the US dollar to a very large extent.
The dollar is the primary tool of a US administration for managing debt and the economy as a whole. When the USD gets a cold, everyone gets pneumonia.
Six months ago, the dollar was looking good. It’s been going downhill ever since.
The immediate future looks bleak:
The much-despised “tariff solution” won’t address a lacklustre revenue outlook. Most analysts have dismissed tariffs as any sort of revenue boost.
Tax cuts during a time of massive Federal debt aren’t impressing anyone.
Interest rate cuts tend to drive currencies down. That’s the administration’s current carrot for public consumption.
In volatile times, investors in stocks and bonds tend to reposition quickly. That means market moves could be sudden and sharp. This is the same environment that caused the big losses earlier this year. This warily-worded comment in Reuters outlines some stocks and bonds possibilities, and it’s hardly a sparkling vista of predictions.
If the US dollar falls enough:
Prices and business costs will go up across the board.
The US economy will have to contract.
Debts in US dollars will become more expensive instantly.
US imports become more expensive in direct relation to the devaluation of the US dollar.
US importers pay tariffs, which are passed on to US consumers. That’s likely to be pretty nasty for imported meds, electronics, etc.
Main Street gets trashed again.
The revenue to prop up the dollar may fall far short of requirements.
This is where the hardheads come in. Forex traders are not famous for their charitable instincts. They make good money out of volatility, but they want to be on the winning side, and they usually are.
The US dollar can’t expect much sympathy from any of the markets. America has been rocking a boat that doesn’t like being rocked. Weird-looking currency risks aren’t popular. The markets trade on margins, not crystal ball readings. They’re not going to buy a US dollar that looks hyper-unstable and badly managed at top levels.
The current default alternative to the US dollar seems to be the Euro. Devaluation of the USD also effectively nullifies the supposed “punishment” of US tariffs. The Euro has an advantage. It’s controlled directly by a central bank, not domestic politics, and it’s pretty solid.
Now the good news, such as it is.
The dollar will have to be defended by those who stand to lose on a significant devaluation. The Fed could buy US dollars to shore up the exchange rate and at least reduce the damage. That could be expensive, though, and suffer the same fate as the besieged Russian rouble, needing 24/7 care.
Things aren’t that bad yet, but it’s a pretty gruesome parallel. “Wounded” currencies can take quite a while to recover.
To be strictly fair – Undermining the greenback isn’t a great idea right now.
The big capital holdings haven’t had time to reposition and manage risk. A sudden move could be a self-inflicted asteroid strike. There are too many rickety ladders and a lot of snakes in this mix.
Be careful, be patient, and diversify. Sound familiar?
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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.
