The U.S. dollar has been on a tear since the summer of 2014, but truth be told, the anti-dollar movement is strong and gaining traction.
For a currency to remain dominant in the global economy, especially for it to be a reserve currency, three factors need to be present: first, the currency has to have widespread use; second, the currency needs to backed by some form of real asset; and most critically, the currency needs to be trusted.
Unfortunately, the U.S. dollar is failing at all three tests.
Use of U.S. Dollar in Global Transactions Declining
More and more, countries are moving away from the U.S. dollar when it comes to global trade, preferring to trade in their own currencies.
There’s a China-led investment bank in the making and it is gaining support. Not too long ago, we heard about countries like Germany, France, and Italy joining. It aims to go against the World Bank and the International Monetary Fund (IMF)—both U.S. dollar-dominated institutions. (Source: The New York Times, March 17, 2015.) I will not be surprised if the membership for this bank increases.
The Moscow Exchange recently launched trading of a Chinese renminbi and Russian rouble futures contract. The reason for this was explained by the exchange as, “The launch has been driven by a substantially increasing Renminbi turnover on the Exchange, growing volume of settlement in the currency between Russia and China as well as newly arising demand for hedging of such transactions.” (Source: Moscow Exchange, March 17, 2015.)
In 2014, at the Moscow Exchange, the use of the Chinese renminbi grew 700%!
Also Read: 2015 Predictions: U.S. Dollar to Collapse
Greenback Has Strong Fundamentals?
Following President Nixon’s abandonment of a gold-backed U.S. dollar, fluctuations in the value of the U.S. dollar against other world currencies have been quicker and bigger, as no real asset backs the greenback anymore. And the Federal Reserve is free to print as many U.S. dollars as its board of governors votes. Since the Credit Crisis of 2008, the Federal Reserve has created approximately $3.0 trillion in new greenback paper money out of thin air.
Then there is the debt the U.S. government has added on. U.S. national debt has soared significantly since President Obama took office, now sitting at more than $18.0 trillion and growing.
When I look at this, I can’t help but ask: would you be interested in owning more of a currency that can be created with the click of a button?
Do People Still Trust the U.S. Dollar?
Finally, and most importantly, trust in the greenback is declining.
While asking for reforms to be made at the IMF, the U.S. Treasury secretary, Jack Lew, said regarding U.S. dominance in the global economy, “Our international credibility and influence are being threatened… To preserve our leadership role at the IMF, it is essential that these reforms be approved. The alternative will be a loss of U.S. influence and our ability to shape international norms and practices.” (Source: Financial Times, March 17, 2015.)
Is the secretary to the U.S. Treasury saying we need to do something now, before it’s too late?
What’s Next for the U.S. Dollar?
Right now, Main Street media buzz suggests a rising U.S. dollar is good, as it will result in higher consumption because Americans will be able to buy imported goods for cheaper. On the other side of the coin, the stronger greenback is putting pressure on the sales and earnings of U.S. companies that operate abroad.
The fact of the matter is that the U.S. dollar is rising on the back of a weak global economy because other currencies are doing horrible. This tide can turn very quickly if: 1) the U.S. economy starts to weaken and the Fed reneges on its promise to raise interest rates this year; 2) the global economy improves; and 3) more countries pull back on the use of the greenback for trade. In other words, this rise in the strength of the U.S. dollar may be very short-lived.