Can Markets Drop US Dollar Values?
Since the introduction of quantitative easing (QE) policies, investors are worried and questioning “will the US dollar fall?” This is an interesting question that may seem simple and reasonable. With America as the axis of the present economic power, it is unlikely that currency crises will occur in the United States. Why?
History records the sudden drop of currency. Some major countries in the world are affected by the value of the currency fall. Argentina, Hungary, Iceland, Venezuela, Zimbabwe and Germany each had terrible experiences in the currency crisis since 1900. The source of any currency problem is the lack of confidence in the stability and or usefulness of the money as an effective selling point or exchange medium .
As soon as the consumer or user stops trusting the currency, then the currency will be in trouble. This may lead to inappropriate valuations, low growth or inflation.
US Dollar Strength
Since the Bretton Woods treaty in 1944, many governments and central banks have relied on the US dollar to support the value of their own country’s currency. Namely through the status of a currency reserve, the dollar receives additional legitimacy in the eyes of domestic users, forex traders and participants in international transactions.
The US dollar is not the only reserve currency in the world, but this is the most prevalent. As of September 2016, the International Monetary Fund (IMF) approved four other reserve currencies: the euro, pounsdsterling, yen and yuan. This is an important thing that the dollar has a rival as an international reserve currency.
Ultimately, the American economy is still the largest and most important in the world. Although growth has slowed significantly since 2001, the American economy is still more regular than those in Europe and Japan. The dollar is supported by labor productivity or at least as long as American workers still use dollars almost exclusively.
US Dollar weakness
The fundamental weakness of the US dollar is all through the orders of the US government. This weakness is followed by every other currency in the world, and is perceived as commonplace in the modern era. However, around the 1970s, it was considered inappropriate. There are fears the government may be printing too much money for political purposes or waging a war.
In fact, one of the reasons the IMF was formed was to oversee the Federal Reserve (the US central bank) and its commitment to Bretton Woods. Now, the IMF uses other reserves as a disciplinary action for Fed activities. If a foreign government or investors decides to switch from the US dollar en masse, a very large volume position can significantly hit anyone with dollar-denominated assets.
If the Federal Reserve creates money and the US government monetizes debt faster than the growth of the US economy, surely the future value of the currency will fall. Fortunately for the United States, almost every alternative currency is backed by the same economic policy.
There are several scenarios that may cause a sudden crisis for the dollar. The most realistic thing is the double threat of high inflation and high debt. A scenario that will increase consumer prices and force the Fed to raise interest rates sharply. Most US national debt is made of relatively short-term instruments, so the price spike will be like adjustable interest. If the US government struggles to pay interest rates, foreign creditors can dump dollars and trigger a collapse of the dollar.
If the US enters a steep recession or depression without dragging the rest of the world with it, the user will probably leave the dollar. Other options will involve several major economic powers, such as China or the European Union, by restoring commodity-based currency standards and monopolizing the reserve currency. But it has not given clarity and certainty the dollar will fall.
It seems impossible to drop the dollar. It takes a prerequisite to force the dollar to fall. Higher inflation prospects and foreign exporters such as China and Japan do not want the dollar to fall because the United States is an important trade partner. And even if the United States has to negotiate or fail to pay on some debt obligations, there is little evidence that the world will let the dollar fall and allow a domino effect for the world.