The Rising US Dollar - A Mirage

The Rising US Dollar - A Mirage

In early 2021, the US dollar index fell to 89.165, which was the lowest level since April 2018. Since then, the index that measures the US dollar against other leading world reserve currencies has made higher lows and higher highs, recently moving above the 100 level.

The dollar index is primarily exposed to the value of the euro currency. The euro accounts for 57.6% of the index, and it has less exposure to the Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc.

These reserve currencies are freely convertible and are legal tender in stable political and economic countries. The dollar is the leader because the United States of America is the world’s wealthiest nation with the largest economy. The US currency is the benchmark pricing mechanism for most commodities because of its reserve currency status. The US dollar may be rising against the dollar index components, but all fiat currencies, including the US greenback, are losing value in the current global economic landscape.

The trend in the US dollar index

• Short-term - the index moved above the 100-level last week for the first time since May 2020
• Medium-term - the dollar index has made higher lows and higher highs since January 2021.
• Long-term - the index has been in a bullish trend since the 2008 70.80 low.

The reasons why all fiat currencies are losing value

• Inflation - The latest March CPI and PPI data showed the highest inflation levels since the early 1980s.
• Faith and credit - Inflation erodes fiat currencies’ purchasing power causing faith in legal tender to decline and the credit of debt-ridden countries to decrease.
• Gold - the precious metal that is a reserve asset and a historical means of exchange and store of wealth is sitting at just below the $2000 per ounce level after making a new record high in March 2021.

The US dollar is slipping as the world’s reserve currency

• China - China is rolling out a digital yuan and has allied with Russia in a “no-limits” deal to challenge the US’s leadership role.
• Russia - Russia is backing the ruble with gold, declaring an exchange rate of one gram of gold for 5000 rubles.
• Abandoning the dollar for some commodity sales- Saudi Arabia and Nigeria are selling crude oil to China for yuan. Russia is selling oil, gas, and other raw materials to Europe and other consumers for rubles. Historically, the US dollar had been the primary means of exchange for these commodities.
• US policy - The Biden administration under Treasury Secretary Janet Yellen follows a strong dollar policy. However, the geopolitical bifurcation with China and Russia on one side and the US and Europe on the other means that the dollar’s power as a reserve currency is declining.

Significant ramifications for markets across all asset classes

• The US dollar has been the world’s reserve currency since 1945
• The evolution of the fintech revolution - Bitcoin, Ethereum, and other cryptos have moved more towards mainstream means of exchange, challenging fiat currencies, including the US dollar.
• Economic war - Russia and Ukraine are at war, but the geopolitical bifurcation and sanctions have ignited an economic conflict with ramifications for businesses worldwide. Sanctions distort free trade and impact stocks, interest rates, and commodity prices as they interfere with fundamental supply and demand dynamics.
• Ideological bifurcation - China is the world’s leading commodity consumer, and Russia is a substantial raw materials producer. Russia will favor “friendly” countries and punish those that oppose its invasion. Moreover, the Chinese economy is growing and will overtake the US. Chinese plans for reunification with Taiwan could ignite another geopolitical crisis over the coming months and years. China and Russia are a direct challenge to the US’s leadership role and pit autocracy versus capitalistic democracy.
• Multinational earnings - Risks have increased for US companies that do business worldwide because of sanctions and a deteriorating geopolitical landscape. A rising dollar against other world reserve currencies makes US exports less attractive and can weigh on revenues and earnings, pushing the US stock market lower.

Levels to watch in the dollar index

• The March 2020 high at 103.96 was the highest level since 2022.
• A move over that level could be a gateway to much higher levels.
• A rising dollar index could be a mirage- The dollar index measures the US currency against a basket of other reserve currencies. The index could continue to rise, and the dollar may continue to lose purchasing power as the index reflects one-half of a bifurcated world. Moreover, when all fiat currency values decline, the dollar could continue to be the best horse in the glue factory.