U.S. Dollar to Disappoint: 1 Big Reason Why Major Losses Could Be Ahead
U.S. Dollar Down 24% Relative to Major Global Currencies
The U.S. dollar is really worth paying attention to. The greenback could lose a lot of value, which could have dire consequences.
Here’s what investors need to know: the U.S. dollar is losing value relative to other currencies very quickly.
Look at the long-term chart below of the U.S. dollar index to get some perspective. The index tracks the performance of the dollar relative to other currencies.
In the last 35 years, the U.S. dollar has lost close to 24% of its value relative to major global currencies.
Chart courtesy of StockCharts.com
Could the Dollar Drop Further?
In a word, yes.
One of the biggest reasons for this could be the emergence of new currencies.
One currency worth paying attention to is the Chinese yuan. It was added to the International Monetary Fund’s (IMF) special drawing rights (SDRs). We are seeing central banks buy yuan. In the fourth quarter of 2016, when yuan holdings at central banks were reported for the first time, they were at $90.78 billion. At the end of the second quarter of 2017, yuan holdings reached $99.36 billion. (Source: “Currency Compositions of Official Foreign Exchange Reserves (COFER),” International Monetary Fund, last accessed October 10, 2017.)
Simple math here: this represents an increase of more than 9.45% in a matter of a few quarters.
Keep in mind, it was just added to the SDRs. In the next few quarters, it would not be shocking to see yuan holdings at central banks in multiples of where they currently are.
Another currency that’s worth paying attention to is Bitcoin. It could be a force that impacts the value of the dollar significantly. Call it a fad, fraud, or whatever, but the reality is that the cryptocurrency is getting a lot of attention, and a lot of money is flowing towards it. Some are even asking whether Bitcoin could replace the dollar.
Look at the chart below of the price of the Bitcoin.
Chart courtesy of StockCharts.com
In the last few years, Bitcoin has seen a solid move to the upside. It is being dubbed an alternative currency.
Why Does U.S. Dollar Decline Matter?
You see, over the years, the U.S. government has accumulated a lot of debt. Currently, the U.S. national debt stands at around $20.0 trillion. A lot of this debt is owned by institutions, governments, and central banks around the world.
As the value of the dollar goes down, all of a sudden institutions, governments, and central banks could be seeing the value of the debt they purchased decline.
What do you think they could be doing?
One thing they could do is pull back their lending to the U.S. government. This could be detrimental. If the U.S. government can’t borrow money easily, it could run into a lot of financial woes, and this could cause a severe recession in the U.S. economy.
Or they could simply look to liquidate. This would cause interest rates to soar and, all of a sudden, the U.S. bonds market could be in trouble and the future of the financial sector could become questionable.
Both of these cases, dear reader, are not good.
Will the U.S. Dollar Decline Instantly?
Understand that the U.S. dollar still remains a dominant currency in the world. The majority of world trade is still valued in dollar terms, and the U.S. dollar is widely held by central banks and governments. It’s not going to go down without a fight.
Initially, I expect the U.S. dollar’s decline to be relatively gradual. As it continues, we could see more sellers come in and the decline would intensify.
Be very careful. The U.S. dollar could be setting up to decline significantly. Ignoring all the warnings could be a big mistake.