By François Rimeu, Senior Strategist, La Française AM.
Tension in the Unites States is palpable. As the Covid-19 death toll continues to rise and anti-racism protests are held across the country, investors are asking a question: is it plausible that the dollar lose its status as the World Currency? François Rimeu, Senior Strategist, La Française AM, provides insight:
For the USD to collapse, investors would have to believe that a viable alternative exists. And at the present time, we just do not see a currency strong enough to play that role. The next most popular currency after the USD is the EURO. However, as of the end of 2019, the EURO only represented 20.54% of the official foreign exchange reserve vs 60.89% for the USD. This breakdown has been more or less stable over the last 20 years, so there is no “momentum” in favor of the EURO. Some parties have suggested the Bitcoin as an alternative to the USD, but we strongly disagree with that option as there is no transparency, no central bank, high volatility, etc.
Additionally, countries like China and Japan, that are in a position to make the USD weaker given their excessive holdings in USD, are not keen on doing so as they are big exporters to the United States. They are however slowly diversifying their economies, but it will require time to achieve economic decoupling with the US.
That being said, we could see the value of the USD decreasing over the medium term given the general economic context:
- The USD is currently judged expensive if judging by classic metrics, i.e. Real Effective Exchange rate;
- The United States is running a persistent current account deficit, which is negative for the USD.
- Real interest rates have been steadily decreasing in the United States, touching zero in March 2020;
- Market positioning appears to be long the USD.
Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, an invitation or a recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française AM are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.