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Some analysts base their view of a weaker U.S. dollar on three points:
1) "De-dollarization” of the world;
2) Trump wants a weaker USD to stimulate exports;
3) The U.S. trade balance implies a weaker dollar.
We consider these arguments to be incorrect. Here is why.
a) The myth of the “de-dollarization”
The american dollar is the world’s reserve currency because it has the largest economy in the world and its consumers are among the world’s wealthiest.
There cannot be a de-dollarization since there is no substitute for the U.S. consumer. Neither the chinese or the european consumers are close to overtaking the american ones. To the contrary, the demographic trends in these regions point out to weaker future consumer spending.
There is also the following question that must be asked: if investors no longer wanted the USD, what currency could they buy? Brazilian real? Turkish Lira? South African Rand? Chinese Yuan? The swiss franc or nordic currencies are not an alternative due to the small size of their financial markets.
The eurozone has its own issues in terms of growth, political uncertainty, and sovereign debt quality. Its financial markets are also much less liquid than the financial markets in the United States. The EUR cannot replace the USD.
Finally gold cannot be a substitute for the dollar as gold is not a productive asset.
One can go through all the currencies in the world. But at the end, the dollar is the only currency that offers investors safe and liquid sovereign bonds as well as liquid bond, equity, and real estate markets. As long as the american economy is strong and american companies thrive, there is no currency that can seriously challenge the U.S. dollar.
b) Trump wants a weaker dollar
The reality is that a strong currency leads to lower interest rates. A weak currency leads to higher rates.
The american economy works with credit so it must have low interest rates to properly function. Trump may state that he would like a weaker dollar, but he watches the mortgage rates much more closely than any other economic indicator.
c) The myth of the “trade deficit” problem
Trade deficits are not necessarily negative if the reason is a strong domestic economy and there are significant investment flows made by foreigners.
The United States has the biggest economy in the world and probably the most dynamic as evidenced by the high number of start-ups. This is why the United States attracts to much capital. The United States also has the most resilient economy. Recently we saw how the economy of the United States outperformed other economies after the shock of the covid-19 pandemic.
Two other points should also mentioned. First, the US trade deficit as percentage of its GDP has improved over the past twenty years. Second, the US trade surplus of services continues to grow as the american economy has evolved into a higher valued added, knowledge-based economy.