Published Thursday 22nd October 2020
The American dollar’s status as the world’s reserve currency has afforded it a position of privilege for decades. However, many analysts argue that it is on a significant decline.
Although exacerbated by the COVID-19 crisis, the problems faced by the USD are not solely down to the pandemic; the potential for a reduction in economic allure has been developing for some time.
Economists suggest that the US dollar is on the brink of an imminent collapse and may fall as much a 35 percent by the end of 2021.
Why is the US dollar so vulnerable, and what are the threats looming over it?
Domestic Saving Collapse and Account Deficit
One integral reason behind the weakening of the USD includes the lethal combination of insufficient domestic savings and a growing account deficit. As the demand for American exports continues to decline, the account deficit gapes further.
The continuing trend in the shortfall of domestic savings has led to this deficit and has prompted borrowing surplus from abroad. Without this borrowing and potential further borrowing, growth will be impossible.
As a result, the US saving rate is expected to fall further than during the global financial crisis.
A Global Move Away From the USD
As the US has had to rely on borrowing to supplement its account deficit, the dollar’s privileged position as the leading reserve currency is being questioned, and foreign lenders and investors are beginning to move away from it.
The perceived poor handling of the pandemic by American authorities has also meant the dollar has been seen in a more negative light than, for example, the euro.
Another major threat to the integrity of the dollar is the reduced global appetite for the currency. Both Russia and China have made moves to distance themselves from the dollar due to political and trade tensions.
In 2019, China and Russia came to an agreement to disregard the USD and use national currencies when trading with each other. This led to a reduction in the dollar’s global traffic.
The Rise of Cryptocurrency
The potential threat that cryptocurrencies like Bitcoin should not be ignored. The volatility of this kind of currency threatens the stability of a single monopoly.
Some experts see the rise of cryptocurrency as the main rival to the USD’s dominance. However, for this to become a reality, a cryptocurrency would have to become a major reserve currency which is unlikely to happen soon, despite its growing popularity.
The Presidential Election
The upcoming November presidential election also compounds the uncertainty of the direction of the dollar.
Much speculation surrounds the future of the dollar after the coming election, but some experts suggest that it will see a boost. Historically, the dollar has strengthened within the first 100 days after an election.
With predictions for the US dollar going either way, perhaps only time will tell whether it will be able to hold onto its economic importance.
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