Is the dollar due to plunge?

published 1 October 2020

Investors are still turning to the US dollar in times of stress. The US dollar index, which measures the greenback’s value against a basket of six major trading partners’ currencies, has slipped by more than 6% since April this year as the stockmarket rally gathered strength. Yet as pandemic and political anxieties resurface, the dollar is bouncing back. The currency was trading close to two-month highs this week.

Some have asked whether the dollar’s days as the world’s “reserve currency” are ending, says Colby Smith in the Financial Times. But as recent weeks show, in periods of global “financial stress” and “risk aversion” people still want to buy up “dollar assets”, says Adam Slater of Oxford Economics. The greenback’s “dominance is sweeping”. The dollar accounts for about 60% of global foreign-exchange reserves, about three times as much as the euro.

Not so fast, says Stephen Roach on Project Syndicate. Glaring structural imbalances – not least a budget deficit that has surpassed $3trn this year and the worst current-account shortfall since 2008 – will weigh heavily on the currency. So will the weakening “special aura of American exceptionalism that has given the dollar Teflon-like resilience” since 1945. A key way to boost an exchange rate – an interest-rate hike – has been ruled out by the Federal Reserve. Expect the dollar index to “plunge by as much as 35% by the end of 2021”.