So overseas investors have less need to seek refuge in US assets, which always boosts the greenback. Indeed, earlier this year, when markets fell globally and economic growth cratered, there was a rush into dollar-denominated securities.
Since that peak in March, government relief has helped economies recover—and the dollar has fallen Aiding that, Citi noted, was a plunge of US short-term interest rates to near zero, which means less return on American fixed-income securities. Another factor: the big economic comeback in China, where the virus has been all but wiped out, for now. Meanwhile, gold prices surged for a couple of months in June and July, but then retraced those gains over the balance of the year.
It was a different story for cryptocurrencies. Bitcoin, which surged four-fold since June, or two-and-a-half times the late spike that, at the time, had been depicted as one of the greatest speculative bubbles in history. Three, the Federal Reserve. When current account deficits are under pressure, the central bank can usually be counted on to come to the rescue by tightening monetary policy.
A still-raging pandemic and an economy on the brink of a double-dip recession leaves the Biden administration with no choice other than to opt for another round of massive fiscal relief.
This outcome would have consequences for any economy. For savings-short America, it spells a weaker dollar. Never miss a story! Stay connected and informed with Mint. Download our App Now!! It'll just take a moment. Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image. Currency collapses are caused by a lack of faith in the stability or usefulness of money—either as a way to store value or as a medium of exchange. Ever since the Bretton Woods Agreement in , other major governments and central banks have relied on the U.
The U. Finally, the American economy is still the largest and most important economy in the world. Even though growth has slowed significantly since , the American economy still regularly outperforms its peers in Europe and Japan.
The fundamental weakness of the U. This weakness is shared by every other major national currency in the world and is perceived as normal in the modern age. However, as recently as the s, it was considered a somewhat radical proposition. Without the discipline imposed by a commodity-based currency standard such as gold , the worry is that governments might print too much money for political purposes or to conduct wars. If the Federal Reserve creates money and the U.
Fortunately for the United States, virtually every alternative currency is backed by similar economic policies. Even if the dollar faltered in absolute terms, it may still be stronger globally, due to its strength relative to the alternatives. There are some conceivable scenarios that might cause a sudden crisis for the dollar. The most realistic is the dual-threat of high inflation and high debt, a scenario in which rising consumer prices force the Fed to sharply raise interest rates.
Much of the national debt is made up of relatively short-term instruments, so a spike in rates would act like an adjustable-rate mortgage after the teaser period ends. If the U. Another option would involve some major power, such as China or a post-European Union Germany, reinstating a commodity-based standard and monopolizing the reserve currency space.
However, even in these scenarios, it is not clear that the dollar necessarily would collapse. The collapse of the dollar remains highly unlikely. Of the preconditions necessary to force a collapse, only the prospect of higher inflation appears reasonable. Foreign exporters such as China and Japan do not want a dollar collapse because the United States is too important a customer. And even if the United States had to renegotiate or default on some debt obligations, there is little evidence that the world would let the dollar collapse and risk possible contagion.
Rudiger Dornbusch and Juan Carlos de Pablo. University of Chicago Press, Adam Marton. Hungarian Statistical Review, Vadym Lepetyuk, University of Minnesota.
Accessed July 24, Congressional Research Service.
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