The U.S. Dollar Is Losing Its Position As A Reserve Currency

The U.S. Dollar Is Losing Its Position As A Reserve Currency By Safehaven.com

In the past, President Trump has never hidden his disdain for the Fed and its hawkish policies, repeatedly drumming up the fact that the central bank’s interest hike regime was contributing to an overly brawny dollar and a sluggish economy. Trump had even gone as far as asking the White House to explore ways to weaken the currency in a bid to boost exports and spur economic growth.

The dollar has strengthened for much of the past decade, something that has been blamed for the U.S.’ ballooning deficit.

But now Trump is finally getting what he has always wished for: A weaker dollar, albeit not exactly on his terms.

After hitting a 3-year high on 20th March, the Dollar Index–a measure of the currency’s strength against a basket of six international currencies–has declined nearly 11% in one of its most dramatic slides in years. The greenback has fallen so much that hedge funds have turned bearish against the currency for the first time in years.

Source: Reuters, via The Guardian

Source: Investing.com

According to Bloomberg, last week, net futures and forward positions held by leveraged funds against eight currencies ( not including the dollar), tumbled to -7,881 contracts, essentially meaning that there are more investors betting against the dollar than on it. Indeed, Bloomberg says the shorting spree is partly being driven by bullish bets on the euro, with the european currency having outperformed the dollar by 6% since the beginning of the year.

The euro is currently changing hands at USD 1.194 compared to USD 1.109 on January 1.

Source: XE.com

Stimulus Packages

A key reason why the greenback has been losing momentum can be chalked up to the Fed’s expansionary monetary and fiscal policy as well as its massive Covid-19 relief program. The central bank has undertaken a series of interest rate cuts, with the last one coming in March when it lowered the benchmark rate to 0%-0.25%, marking only the second time that rates were effectively lowered to zero (the first time was during the 2008 financial crisis).

The Fed also launched a $700B bond-buying program as well as a generous stimulus to shelter the U.S. economy from the ravages of the pandemic. This includes up to $2.3 trillion in lending to support state and local governments, employers, households and financial markets. The combined effect of these measures has been an increasing supply of U.S. dollars hence the gradual devaluation.

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