The stock market is making history, Corporate America is celebrating tax cuts, and the Federal Reserve is normalizing interest rates and selling off its $4.5 trillion balance sheet. But this doesn’t appear to be enough for the U.S. dollar to gain strength as the greenback is trading at its lowest level in three years.
On Monday, the U.S. Dollar Index tumbled 0.6% to 90.48, settling at its worst point since 2015. Despite soaring above 100 following the 2016 presidential election, the U.S. dollar shed roughly 10% in 2017, which is the largest annual decline since 2003. And the greenback doesn’t seem to be gathering any momentum this year, already down close to 2%.
Wall Street is prognosticating another soft year for the dollar. Jan Hatzius, chief economist at Goldman Sachs, toldbCNBC that the Federal Reserve Note could experience a bad 2018 against a basket of currencies for a myriad of reasons.
He said:
“We still think the dollar is probably going to be relatively soggy, at least against the majors, probably against the emerging economies to a significant degree as well.
(In) that sort of environment it’s usually hard to see large dollar appreciation, so generally slightly softer is the basic view.”
Will President Donald Trump’s MAGA initiatives affect the dollar?
China and Japan Making Dollar Moves
Bloomberg rocked business headlines when it reported that Chinese officials are deliberating to either slow down or stop purchases of U.S. Treasuries. Sources say that U.S. bonds are not as attractive in today’s market, and trade talks are becoming intense between Washington and Beijing.
Officials from China’s State Administration of Foreign Exchange are still weighing their options, but the mere consideration affected the market. The benchmark 10-year note yields slipped several basis points to 2.58%.
China is the world’s biggest holder of U.S. debt with roughly $3.1 trillion. However, Beijing has reduced its purchases of U.S. Treasuries in recent months.
The reports come as the U.S. is preparing to reopen $20 billion of 10-year debt on Wednesday and $12 billion of 30-year bonds on Thursday. With the Fed winding down its balance sheet and budget deficits on the rise, the Treasury Department has stated that it will need to borrow more.
That said, the U.S. government is confident in the nation’s debt. Under Secretary for International Affairs David Malpass told reporters in Brussels:
“The U.S. Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market.”
China isn’t the only culprit. Japan seems to be making serious moves pertaining to the dollar.
Japan’s Ministry of Finance said on Friday that the net purchases of mid- to long-term foreign bonds, primarily U.S. Treasury securities, by native investors cratered 94.6% on the year to $9.9 billion in 2017. This is the first annual decline since 2013.
Accommodative Policies Coming to an End?
It has been about a decade since the global economic collapse. In the wake of the recession, central banks employed a series of unconventional tools to rescue the banking sector, spur growth, and fund exorbitant government spending. Amid anemic expansion, many central banks took it one step further with subzero interest rates. As economies return to somewhat normal, the accommodative monetary policies are gradually reaching their final curtain.
But the Fed isn’t the only central bank that is ending its accommodative monetary policies.
The Bank of Canada (BOC) is gradually raising interest rates. The Bank of England (BoE) is winding down its stimulus measures. The European Central Bank (ECB) is maintaining the status quo – President Mario Draghi has noted that additional instruments will be unnecessary.
Simply put: central banks all over the world are catching up to the Fed’s policy tightening.
With their respective currencies strengthening on the back of recovering economies and central banks returning to normal, the U.S. dollar could have a difficult time keeping up against the majors, and perhaps even emerging markets.
America First May Hurt the Dollar
The unpredictability of President Trump’s America First platform may be hurting the U.S. dollar.
Global investors, central banks, and global leaders are unsure what will come out of the president’s mouth next, or what policy he will put forward. For instance, is Washington keeping the strong-dollar policy of the last 20-plus years or is the White House ditching it in favor of a weaker greenback to boost exports?
It is important to note that the dollar hegemony has been in jeopardy, with or without President Trump’s stance on trade pacts or economic policies.
There have been many developments over the last couple of years by other states to transition out of the dollar. The German central bank announced it would add the Chinese yuan in its foreign exchange reserves, while Russia is making the ruble the primary currency of exchange at all Russian seaports this year.
And this is causing grave concern about the store of value for the greenback, prompting traders and governments to institute a wait and see approach.
Slashing America’s Debt Burden
If investors and Americans alike want the U.S. dollar to survive, then it is critical to tackle the nation’s ballooning debt burden. Unless drastic action is taken now, Washington will be beholden to Beijing and Tokyo, ensuring they continue imbibing America’s astronomical debt.
The national debt has topped $20 trillion, and budget deficits are beginning to climb again. But all three levels of government have a different powder keg about to explode: entitlements. At the federal level, Capitol Hill is facing $120 trillion worth of unfunded liabilities and expenditures. States and municipalities are unsure what to do, witnessing massive gaps in pension funding in front of their eyes.
The bond market is undergoing one of the biggest bubbles in market history. Investors have an insatiable hunger for debt, both government and corporate. President Trump can’t Make America Great Again by relying on foreign governments to bail out politicians putting everything on the credit card. Trump promised the biggest axe on the 2016 campaign trail, but he needs a chainsaw to stop the red ink.
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