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Former MS Chairman Pulling The Alarm On The US Dollar

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EDITOR NOTE: If the dollar’s 11% drop since March seems pretty steep to you, some analysts are forecasting another 35% drop; something we’ve seen only three times in the last 50 years. With its ballooning deficit, protectionist policies, and COVID missteps among others, the US is seen across the globe as a country that has lost its air of exceptionalism, undermining international confidence in its leadership. Many outside the US are thinking that there are other alternatives: the Euro, China’s Renminbi, or gold.

Stephen Roach, former Morgan Stanley MS -0.4% Asia chairman, is sounding the alarm on the US dollar. In particular, he predicts the broad dollar index will drop by 35 percent and foresees legitimate challenges to the greenback’s status as the world’s dominant reserve currency.

A dollar decline of 35 percent is not unprecedented. The US had a comparable decline in the 1970s, and the mid-1980s as well as a 30 percent decline in the early 2000s.

Why the dollar decline now?

First, with a huge increase in the fiscal deficit due to fighting the Covid pandemic, the net savings rate of the US, which has already been trending lower, is going to fall even more. Roach notes that the US entered the pandemic with an already low domestic savings rate of only 1.4 percent of national income. And courtesy of the new gigantic budget deficits, he projects we are going to see a negative savings rate of –5 percent to –10 percent. The nation’s current account deficit looks set to soar.

Second, Roach feels America has squandered its global leadership in numerous ways—de-globalization, trade protectionism, poor response to Covid—to name a few.

And there are plenty of alternatives to the US dollar—including the euro and renminbi.

The dollar has remained quite strong during the past few years because of foreigners’ belief that the US is “exceptional”.  Foreigners have been willing to pay a premium for the dollar. But the bloom may be off the rose, so to speak. 

The US dollar’s plunge of over 4 percent last month jolted markets profoundly.  The US dollar index=USD, which measures the greenback against six other major currencies, is currently down around 9 percent from its March highs. Hedge funds are warning that shorting dollars is now a crowded trade.

A lower dollar will mean two things for foreigners. First, they can buy more US assets (including Treasuries) needed to fund the growing US current account deficit with less of their own currencies. And second, a lower dollar buying point makes US assets more attractive to foreigners as the US currency risk has been decreased.

Originally posted on Forbes

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