Dollar is Weakening, Why and How Long? – Prof K Nageshwar

The dollar is showing weakness. The global market players are busy decoding the reasons and making predictions for the future.

The value of American dollar is proportional to the global economic climate. Dollar is considered as a safe asset when the global economy or polity are in turmoil. This is precisely the reason why dollar value surged in February this year when world was amidst worst fears of Covid-19. But, situation has eased. Many countries have witnessed downward spiral in the number of daily new cases. Thus, the US dollar started weakening.

Second, the supremacy of American dollar is not the result of its economic dominance alone. The geo political factors that take into account political, economic, military dominance of united States contribute to the confidence of the world in Dollars. This is the reason why, countries and the global rich put their surpluses in dollar and dollar denominated assets. The manner in which US handled the Covid 19 and its health and economic fallout painted a very bad picture of this great nation.

Trumps’ unilateralism and self imposed isolationism have also weakened the American stature in the comity of nations. In fact, in the pre Corona period, China was providing much serious challenge to US hegemony. But, the nature of Chinese political and social system, its State controlled market economy and fears over dependence on china have all contributed to the reduced challenge to US hegemony from Beijing .

Third, to tide over the ballooning budget deficits, the American Federal Reserve has been resorting to policy of monetary easing. The US pursued similar policies in the aftermath of global financial crisis of 2008. This led to relatively higher supply of dollars and raised fears of inflation resulting in lower value for dollar.

Fourth, the United States opened currency swap lines with friendly countries as latter faced severe foreign exchange crisis due to covid 19 induced economic crisis. This has also contributed to increased supply of dollars in the global market. Fifth, the United States seems to be preferring lower value for dollar at this point in time to boost its export potential
Finally, the American trade and other sanctions are forcing countries like Russia, china, Iran etc. to shift to financial assets other than dollar to ward off any possible attack from United States.

But, experts in global finance feel that this weaker dollar is only a temporary phenomenon driven by short term factors. There is no immediate challenge to US global hegemony. The US is still stronger in advance financial services, bio technology, Pharmaceuticals, health care technologies and a host of other critical areas of modern economy. Suspicion and apprehension over China have only increased in post covid world . Despite global economic gloom, the US economy is showing relatively better signs of recovery . Thus the American dollar continues to enjoy global preference.

By — Prof Nageshwar

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