Has the US dollar had its day?

Has the “mighty greenback had its day”? asks Jonny Fry in City AM. Soaring debt levels and the failure of America to manage the Covid-19 crisis is undermining trust in the world’s reserve currency.

The ICE US dollar index, which compares the value of the greenback against a basket of other currencies, has advanced by just over 1% this year. The US dollar is considered a safe-haven asset, so its value surged during the market meltdown in March, only to retreat as the stock rally gathered pace.

“A crash in the dollar” could well be looming, says Stephen Roach on Bloomberg. The fundamental issue is that Americans do not save enough, forcing the economy to import foreign capital: America has run a current-account deficit every year since 1982. That arrangement depends on the trust and confidence of foreign savers, many of them Chinese. “Gross mismanagement” of the coronavirus pandemic, combined with “wrenching social turmoil”, is not a good look for a global leader. Growing debt is another threat to the dollar’s credibility. The Federal budget deficit looks set to hit a peacetime record of 17.9% of GDP in 2020.

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Still, the dollar’s role as a global safe haven is not over yet: the currency gained ground again as stocks wobbled at the end of last week. The greenback’s fundamentals may be weakening, but for the time being nervous markets appear inclined to put a floor under it.