There's perhaps no better symbolic representation of America's financial
might than the U.S. dollar. And right now, the world's top currency is
taking a big, mighty punch.
The dollar has slumped more than 10% this year, posting its worst decline in the first six months of a year since 1973, back when President Nixon shocked the world by detaching the dollar's value from gold.
The
decline reverses a long stretch of annual gains for the dollar — and
it's especially confounding given that the U.S. economy is still doing
well.
"America was already great," says Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management.
"We
are coming from a very strong dollar level where U.S. exceptionalism
was what everybody was speaking about in financial markets," he adds.
Many investors now fear the decline could reflect a new reality for
the U.S., just after the country celebrated its 249th birthday.
A
series of chaotic policies and statements by Trump — from tariffs to
attacking the Federal Reserve — has shaken some of the confidence
investors around the world had long held in the U.S.
But it goes beyond that. The country's debt is ballooning — and will
grow even more with the GOP megabill that was passed by Congress last
week. Meanwhile, there are real concerns about what the deep political
divisions will mean for the U.S.
The big question now is: Does this re-assessment reflect a long-term shift or just a momentary blip?
The case against the American dollar
Whether
one agrees or disagrees with President Trump, one thing is clear: His
second term is shaping up to be quite different — and it's unnerving
many investors, both in the U.S. and abroad.
The chaotic rollout of tariffs has led to widespread uncertainty across businesses in the U.S. and around the world.
But
President Trump has also disregarded other norms. He's picked a fight
with the Federal Reserve and Chair Jerome Powell over interest rates,
for example, upending a tradition upheld by most American presidents not
to interfere with the independence of the central bank.
And at a time when there are already serious concerns about the country's finances President Trump on Independence Day signed a massive bill passed by Congress last week that will rack up trillions of dollars in additional debt.
Of
course, the U.S. debt load has been rising significantly for years ever
since President Clinton and Congress managed to balance the budget in
the 1990s.
Kenneth Rogoff, a former chief economist at the
International Monetary Fund, and now a professor at Harvard, says those
years of inaction to deal with the rising debt levels are contributing
to the dollar's decline.
"How much do investors want to be
overweight in dollars when they can sort of see this slow-motion train
wreck coming?," he asks. "While I wouldn't read too much into the
dollar's fall this year, there is no question that there is this broader
underlying trend of moving away from the dollar — and Trump's been an
accelerant."
Foreign investors have indeed responded — by selling American stocks
and bonds, which has pushed the dollar sharply lower. That's because
when a foreign investors dump shares in a company for example, they then
effectively sell the dollar and convert it back to their home currency.
A
widely followed survey by Bank of America of fund managers around the
world reflects this selling quite starkly. Fund managers had preferred
U.S. stocks over international stocks for most of the past two decades —
but that's changed this year.
But the latest survey out in mid-June showed a startling statistic: Only 23% now preferred U.S. stocks.
That's amply reflected in how stocks around the world have performed this year.
Yes,
the S&P has just hit record highs, recovering from steep losses
earlier this year, helped by a good performance in sectors like
technology. But consider this: Even with the most recent gains the
S&P 500 — representing the biggest 500 companies in the U.S. — is up
more than 6% this year.
However, that compares to both Germany's DAX index and Hong Kon's
Hang Seng Index, which are up nearly 20% this year as of the end of last
week. Several other international stock markets have also gained
significantly.
The case for the American dollar
Not everybody is convinced that the dollar's decline is an alarming trend.
Under
this thinking, the U.S. has gotten used to outperforming global markets
for years, so a months-long reversal is not necessarily catastrophic.
It's just a re-adjustment that had been coming.
And then there's a long-held market adage: TINA, as in, There Is No Alternative.
The
dollar is by far the most widely-held currency in the world, used by
everybody from governments to multinational companies to drug cartels.
And there's no bigger and more diverse market than the U.S., whether it be stocks or government bonds.
There are also benefits to a weaker dollar.
Yes, a weaker dollar makes it more expensive for Americans to travel abroad, but it's good domestic tourism, while exporters like Apple, which earns a substantial portion of its revenue from countries abroad.
And
American companies that have long faced cheaper imports would get a bit
of a boost. The weaker dollar would make foreign products a little more
expensive — even more so when tariffs kick in — giving domestic
manufacturers a major leg up.
There's a temptation for a lot of people to think of the strength of
your currency as some sort of national virility symbol," says Kit
Juckes, the Chief FX Strategist at Societe Generale. "It really isn't."
"You
shouldn't expect to have a super, super, super strong currency
forever," Juckes adds, citing the impact on workers in sectors such as
manufacturing or agriculture that become less competitive when the
dollar is strong.
Currencies like the euro or yuan could challenge the dollar' dominance
So then, what's next for the dollar? That, as it turns out, is the trillion-dollar question
Despite the dollar's steep decline this year, few analysts are
willing to make sweeping judgements about what it symbolizes for the
U.S. At least, not yet.
But the concerns remain about whether
the dollar's decline is a reflection of a long-term reassessment of the
U.S. financial standing in the world — and a sign that the overwhelming
dominance of the dollar might be coming to an end.
Rogoff, who
recently authored the book "Our Dollar, Your Problem," says the U.S. has
long depended on foreign investments as a critical source of capital,
investments that have helped make the dollar the world's reserve
currency.
But as the U.S. faces entrenched problems like surging debt levels, perceptions about the U.S. could change.
"The dollar franchise isn't gone, but it's weakening materially," he says.
Rogoff
believes that over the next 10-20 years the world will see "a more
tri-polar system" as the euro, the Chinese yuan, and even crypto
currencies, emerge to challenge the dollar's dominance.
"The
dollar's reserve currency status has been fraying at the edges for at
least a decade," Rogoff says. "And the process is accelerating under
Trump."
