U.S. Dollar: Loss of Value, Collapse-Like Scenario Possible
The U.S. dollar, as it stands, remains the king of currency. However, its status could be challenged in the coming years.
Don’t take the greenback for granted, as it may lose a lot of value. In fact, a scenario not unlike a collapse could be possible.
U.S. Dollar Demand Diminishing, New Rivals Gaining Popularity
Why have such a dire outlook on the U.S. dollar? Because its fundamentals are deteriorating very quickly.
You see, the U.S. dollar is king because there’s a global demand for it. But right now, that demand is being challenged.
One of the biggest rivals of the U.S. dollar currently is the Chinese yuan.
Over the past few years, the yuan has made a lot of headway. China has set up hubs where the yuan can be purchased, opened a bank similar to the International Monetary Fund (IMF), and performed trade deals using the currency.
Not too long ago, the yuan was also added as one of the major currencies recognized by the IMF. Central banks are now buying the yuan for their reserves.
At the end of 2017, central banks held $123.5 billion worth of the Chinese yuan. At the end of 2018, it was $202.8 billion. That means that in a matter of a few quarters, the yuan holdings at central banks increased over 64%. (Source: “Currency Composition of Official Foreign Exchange Reserves,” International Monetary Fund, last accessed April 10, 2019.)
Certainly, the money put toward reserves is nowhere close to the money allocated toward the U.S. dollar. That said, the solid increase in reserves shouldn’t be ignored.
In this same period, the U.S. dollar allocation increased just a little over five percent.
U.S. Government Spending Without Remorse
The greenback’s value is highly dependent on what the U.S. government does.
Unfortunately, as it stands, the government continues to spend without remorse. It’s incurring budget deficits, and deficits are never good.
Consider this: in the first six months of fiscal-year 2019, the U.S. government already incurred a budget deficit of $691.2 billion. In the entire fiscal year 2018, the budget deficit was $778.9 billion. (Source: “Monthly Treasury Statement,” U.S. Department of the Treasury, last accessed April 10, 2019.)
The U.S. national debt already stands at $22.0 trillion, and given how big the deficits have been lately, it could surge even more.
This is bad news for the U.S. dollar.
Federal Reserve Throwing More Gas on the Fire
Lastly, remember that central banks have a major role in dictating the direction of currencies. And right now, the Federal Reserve’s behavior is suggesting that it wants the U.S. dollar to go lower.
How so? Well, not too long ago, the Federal Reserve came out and said it will be patient with its monetary policy. It looks like it could even lower interest rates sooner rather than later.
This uncertainty could cause investors to ditch the U.S. dollar, and its value could decline relative to major currencies.
Where’s the U.S. Dollar Headed Next?
I am watching the U.S. dollar index very closely. See the chart below:
Chart courtesy of StockCharts.com
Since mid-2018, the index hasn’t moved much. It’s essentially saying that the U.S. dollar hasn’t really done much against major currencies.
As such, I believe that the downside could be ahead.
Long-term, I think the value of the U.S. dollar could be much lower in the next five years than it is currently, though only time will tell.