Greenback blues: Are the doomsayers finally right about the demise of the U.S. dollar?
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“Our role as a global leader is tarnished to say the least,” Roach said.
The dollar has historically been strong when it has found itself on either end of a framework called the dollar smile, Scotiabank chief currency strategist Shaun Osborne said. On one end of the smile — picture a wide “U” shape — the greenback strengthens due to investors becoming risk averse. At the other peak, itralliesbecause the U.S. economy is growing and demonstrates a yield advantage.
Currently, neither one of these conditions is in place, he said. As foreign economies continue their recoveries, investors are once again willing to take on more risk and redirect some of their portfolios towards emerging markets. The Euro and Yen have appreciated substantially as a result.The U.S.economy, thanks to a poor response on COVID-19, is also lagging.
In a note published last week, a team of Goldman Sachs analysts wrote about how several factors, including a poor economic environment are leading to the dollar’s loss in value and “real concerns” surrounding the greenback losing its position as the reserve currency for global central banks.
The report pointed to rising political and social uncertainty as well as a destabilizing second wave of COVID-19 cases, but crucially, it also highlighted the rising risk of inflation.
“This relentless decline in real interest rates against nominal rates bounded by the U.S. Fed has caused inflation breakevens to rise in an environment that would ordinarily be viewed as deflationary,” said the team, led by head of commodities research Jeffrey Currie. “Ironically, the greater the deflationary concerns that policymakers must fight today, the greater the debt build up and the higher the inflationary risks are in the future.”