Why the US dollar slide may be a sign of real danger this time
- The rare event of a general depreciation of the world’s leading currency suggests a fundamental lack of faith that could sink financial markets and undermine the global economy
- Recent events suggest the dollar could erode from within as the US retreats from international obligations and its domestic economy weakens
What makes the behaviour of the dollar particularly ominous is that the world’s key currency is sliding not only against benchmarks such as gold and silver but also against many measures of value including other key currencies. A general depreciation of the world’s leading currency is rare.
Even if the main reserve and transaction currency is not exactly tottering, its wobbles hint at scenarios where it has to share pole position with other currencies, an unstable state in itself.
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Dollar depreciation could, as some suggest, simply reflect the fact that financial managers everywhere are “rotating” out of the US currency in search of yield as real or inflation-adjusted returns on dollar securities hit zero or even negative levels.
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Unconventional monetary policy has tested credibility among those who feel uneasy about the availability of so many “free lunches”. First, interest rates fell to historic lows or even zero, central banks vacuumed up securities from the market and then governments began giving away money.
The motive behind all these moves is the need to maintain aggregate demand, prop up asset values and avert a financial system crisis. But as Hung Tran, at the Atlantic Council in Washington says, central banks risk creating moral hazard by acting as overzealous lenders of last resort.
This “trap”, as he notes in a recent paper, “occurs when market participants perceive little-to-no consequences for potentially excessive risk taking, as they come to believe that they will be protected should things go awry”.
It is hardly surprising that people do not worry too much about abstract-sounding issues like moral hazard when much more immediate health hazards such as the coronavirus are dominating attention and debate around the world.
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But financial hazards arise not only from actions on interest rates and other monetary accommodation. Central banks have enabled governments to finance fiscal stimulus to the tune of US$11 trillion during the pandemic, pushing total government debt to US$70 trillion, according to the Institute of International Finance.
Which brings us back to the dollar, with markets seeing a debased currency hardly worth the paper it is printed on. They are buying precious metals instead, and non-dollar currencies. This is dangerous because many things could fall with the dollar, from global reserves and trade, to banking and financial transactions and commodities.
The US could be the biggest loser. The exorbitant privilege it enjoys because the dollar is the global currency means the US does not face balance-of-payments crises while it imports in its own currency. But the dollar world could go the same way as the sterling area, into obscurity.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
