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The value of the U.S. dollar is on the line.
Where it goes in the future says a lot about where the United States stands in the world economy.
To me, there are three possible paths in front of us.
And the path that comes to fruition will have a major impact on the future of the U.S. in the world.
Since December 2022, the value of the U.S. dollar has roughly fluctuated between $1.0500 for one Euro and $1.1100 per dollar.
Here is the dollar/euro performance since then
U.S. Dollars to Euro (Federal Reserve)
The first path centers around the election of Donald Trump as the next President of the United States.
Mr. Trump has clearly indicated, several times, that he wants a cheaper dollar. Mr. Trump wants trade, and a cheaper dollar will help him to achieve that goal. A cheaper dollar will make U.S. goods and services cheaper in world markets, and hence, will reduce the current trade deficit.
I list this possibility first because it, to me, is the most certain, IF, Mr. Trump gets elected
Of course, Mr. Trump would face the fact of the Fed’s independence in policymaking, but he has indicated… several times… that he believes that the President of the United States should have more “say” in the making of Federal Reserve policy.
If Mr. Trump is re-elected as the President of the United States and can play a bigger role in Federal Reserve decisions, the value of the U.S. dollar WILL fall.
Mr. Trump could get the Fed to lower its policy rate of interest and move to a position of “quantitative easing” where it was increasing the number of securities in its securities portfolio. This would result in money leaving the U.S. financial market to invest in higher yields around the world, resulting in a decline in the value of the dollar.
I am not making a judgment here… I am just stating what, I believe, will happen if Mr. Trump is re-elected. And, if Mr. Trump gets re-elected, then the other two possibilities can be dismissed.
The second possibility relates to the Federal Reserve and what the Federal Reserve will do concerning its monetary policy.
Federal Reserve Chairman Jerome Powell and the Fed are fighting inflation. This fight is now in its twenty-ninth month.
Mr. Powell and the Fed want to be sure that they have defeated most of the inflationary pressures and do not want to let up their battle until they are convinced that inflation, in the future, will remain around their policy target of 2.0 percent inflation.
The particular stance that has been taken is that Mr. Powell and the Fed want to err on the side of being too cautious about controlling inflation. They do not want to “ease up” on two and one-half years of battle prematurely.
So, Mr. Powell and the Fed continue to keep their policy of “quantitative tightening” in place and continue to postpone a reduction in the Fed’s policy rate of interest until they are clearly confident that inflation has been contained.
And, they are hesitant about reducing the Fed’s policy rate of interest right before the election. They want to avoid any charge of making the policy more for political reasons.
If the Federal Reserve continues to be reluctant to reduce its policy rate of interest, the value of the U.S. dollar will remain strong in world markets. This strength remains as the central banks of other major countries continue to reduce their policy rates at a faster rate than the Federal Reserve System.
The third factor playing into the picture is that of the BRICS nations, plus others, who are attempting to weaken the role of the U.S. dollar in world economic and financial affairs.
This group has been working to reduce the role of the dollar for some time now and has continued to attract more nations into their effort.
For the BRICS effort to succeed, however, it would take some time, for the BRICS are a long way off from overcoming the position of the U.S. dollar in world currency markets. Unquestionably, the U.S. is maintaining its strong position in the world, although there has been some modest decline in the use of the U.S. dollar in world trade.
It remains to be seen just how much pressure this group of discontented nations can bring on the dollar. And, of course, the ultimate result will depend upon what the Federal Reserve and the U.S. government do to keep the U.S. dollar strong in world markets.
The Future
The U.S. government appears to want to keep the value of the U.S. dollar strong in world markets, but it does very little talk about the strength of the dollar and the things that might be done to keep the value of the U.S. dollar up.
To me, a strong U.S. dollar is the backbone of the country’s economic strength.
Having the world’s reserve currency and conducting economic and monetary policy in a way that would sustain this position is the foundation of the economic strength and productivity of the nation.
Once a country loses that “number one” position, then discipline seems to fall aside as the government works in other ways in an attempt to maintain the country’s position in the world.
The U.S. has the strongest economy in the world. A foundation for this strength is the strength of the country’s currency.
A country that maintains monetary and fiscal discipline to support a strong currency, is a disciplined country that maintains its lead in efficient and effective productivity.
And, this foundation is as good as it can get for the investment community.
The United States has held this position in the world for some time.
I see no reason for not sticking to this game plan going forward.
