Strong Dollar… Has Never Been Weaker?
Ty J. Young Editorial
Stock market euphoria… glowing jobs report… apparent economic growth… and a strengthening dollar all provide evidence of the boom that has been launched with the advent of the Trump era.
Despite the relative dollar strength on the global currency markets, a less obvious conclusion may be that the U.S. dollar has never been weaker.
Dollar strength or weakness can be a good thing or bad thing based upon other fundamentals in the marketplace. The current strength of our currency is surprising, given recent comments from President Trump and Treasury Secretary, Steve Mnuchin
But strong it is. The dollar has seen almost a 10% rise in value over the last calendar year, with most of that spike occurring since the election of President Trump.
A strong dollar has been U.S. policy for decades, despite the fiscal and monetary policy to the contrary. And most countries view a strengthening currency as a hallmark of a growing and prosperous economy.
So why is our currency, supposedly stronger than we have seen in years, possibly weaker than we ever could have imagined?
The dollar has always been backed by gold and became the global reserve currency after World War II explicitly because of its convertibility into gold. President Nixon ended dollar convertibility in 1971, and since that time the dollar floated in value against other currencies.
What has maintained our reserve currency status is power. The U.S. backed the global order from Asia through Europe by force of arms. The U.S. was the primary supporter of emerging markets; the U.S. set policy on global economics; the U.S. underwrote the costs of the UN, World Bank, IMF and many other global institutions; and most importantly, the U.S. maintained the open shipping lanes and freedom of navigation necessary to keep the global supply chain moving.
That came to an end under President Obama – he withdrew our forward deployed leadership in the Middle East, allowed China to be more assertive in Asia, and signaled to the world our withdrawal from leadership and enforcement of the global order. To date, President Trump’s “America First” policies do not suggest an aggressive American role in settling global affairs.
The dollar was once backed by gold, and always backed by American power. In today’s world, how strong is the dollar in realistic terms? And does it matter?
I. Three Reasons the Dollar Could Drop in Value:
1. Trump agenda calls for massive stimulus – more dollars lower their value. A $1 trillion infrastructure project… increase in defense spending… massive tax cuts… all of this fiscal stimulus creates deficits. An increase in deficits means more borrowing, and more borrowing means a weaker dollar.
2. Currency wars mean a race to the bottom. In order for their exports to compete, foreign governments have been lowering the value of their currencies relative to the dollar for years. This “race to the bottom” has meant every currency, including the U.S., has gone down in value. As a foreign government manipulates it’s currency downward, the market adjusts the dollar’s value accordingly. If that off-sets the foreign government’s move, then they simply adjust downward again.
3. Global competitors decide to use other currencies. Why should other countries use the dollar? We are not backed by gold, no longer backed by power, no longer enforcing global order. This is a discussion happening daily amongst finance officials around the globe. The less the dollar is used in transactions, and the more in circulation through debt financing, the lower the value will be. Right now Russian troops are in Syria, Libya, Iraq and most recently Egypt. China is building islands in the South China Sea. Former colonies such as the Philippines publicly suggest leaving us and joining a Chinese alliance. Was ANY of this possible before 2008?
II. Three Reasons the Dollar Should Remain Strong:
1. Still today the dollar remains the best, most important currency. When you are used in at least one side of 80%+ of all transactions and trades globally, and for 65% of transactions and trades you are the currency used by both parties, it is hard to argue the dollar has lost its place as the global reserve currency. America retains the deepest capital markets, a vibrant and innovative private sector economy, the safest and largest repository of stored gold, and a functioning rule of law that protects your investments. Anyone who has just a couple of those advantages, much less all of them, will have a strong and attractive currency to do business with.
2. Trump may reverse the Obama era withdrawal. With Russians on the march in both the Middle East and Europe… the Chinese extending their defense perimeter into the Pacific… Iran emboldened, enriched and empowered by the Obama Administration’s nuclear deal… it is hard to see where the U.S. can contain the damage wrought by the last 8 years. BUT, despite these setbacks, Trump has promised to destroy ISIS. He is committed to a massive defense buildup. Despite warning NATO on defense spending, he seems committed to the alliance… There are signs that Trump intends on stopping our global withdrawal, and retaining our global alliance structure in its current form.
3. Nowhere else to go. If China and the U.S. can’t do business, Vietnam and Malaysia step up to the plate. When Europe is paralyzed by indecision, the British are always at our side. The very nature of U.S. account balance deficits allows for the dollar to remain supreme – we serve as the world’s banker because our politics can withstand the account deficits (for now). China does not enjoy our advantages and their currency is in free fall for the last 2 years… the Euro has been in permanent crisis since 2008… the Russian ruble???). There is only one global currency, despite malevolent interests who would prefer something else, and that currency is the U.S. dollar.
We can’t say the dollar’s global position has been challenged before because it hasn’t. Consider these post World War II events:
A) Defeat in Vietnam
B) Ending the Gold Standard in ‘71
D) Carter malaise and oil shocks of the 1970’s
E) Russian advances during that same decade
F) The 1987 “Black Monday” stock market collapse
G) 2000 dot-com bubble
H) 2001 9/11 recession
I) 2008 banking collapse
All of these events and more did not lead to questioning the value and strength of the dollar. But these are different times. Global events and foreign interests are no longer following our lead, and they are questioning why the “weak horse” still calls the economic shots.
But if the dollar is no longer backed by gold, and if American power appears to be in decline, the dollar still can remain the global reserve currency thanks to the abiding belief in the greatness of the American economy. When disorder spreads around the globe, safety and security of American banks, the legal system, and the American marketplace will help the dollar maintain its preeminent status.
Despite global disorder and bad actors abroad, the dollar may go up and down in value, but you have still enjoyed the most recent gains in the stock market. Now may be time to take some of those gains and put it into a safer place. You can ensure your money is completely protected in the event of the next market downturn. Give us a call at 877-912-1919.