Friday, March 29, 2024

PULPIT: USD path is one to keep your eye on

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The United States dollar (USD) is under pressure. Whether that extends or the USD reasserts itself is open to debate. 
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More commentators are starting to point out fundamental problems with the USD.

A continued weaker USD could have a huge influence on the New Zealand dollar (NZD).

The NZD/USD has risen more than 10%  in four months. That rise is shaving NZD farming returns.

Some of the rise is simply corrective following falls over February and March.

The NZD/USD is broadly in line with levels seen at the end of 2019 and, on average over, 2018 and 2019. Risk appetites have improved as equities recovered and commodity prices have held up reasonably well.

NZ looks better than many nations. Neither exporters or importers are grumbling too much about the NZD/USD, a sign it is reasonable to both though the recent push will likely be raising some eyebrows across exporters.

Gold has hit a record high. That is a sign of nervousness towards the USD, global economy, and poor investment yields such negative real interest rates.

Those shrugging away potential concerns point to the USD’s status as the world’s reserve currency.

A huge proportion of cross-border transactions are in USDs. It is the universal medium of exchange. There are no real currency contenders to take the reserve currency mantle.

The US economy currently faces challenges but is still viewed as dynamic and highly productive. It benefits from safe haven demand for US treasuries (bonds) in time of unease.

The US Federal Reserve might be undermining the USD by quantitative easing (printing money) but so is everyone else with their own currency.  It is difficult to work out who is wearing the cleanest of all the dirty shirts.

Dig below the surface and some pertinent questions are being asked about prospects for the USD.

Think of the USD as a scorecard on the US economy. Yankee Doodle is looking less dandy. Covid-19 is biting and – some believe – mismanaged. Social disorder is rising and protectionism is being pursued. 

The US has also taken defining stances on the Paris Agreement on Climate, World Health Organisation and Trans-Pacific Partnership. Those stances signal a further winding back of globalisation.

While the US has been the dominant empire post WW11. Empires, just like the British and Roman ones did, invariably face challenges.

The US (and global) economy is very unbalanced. It has been for a long time. The US economy has a low savings rate; they spend for today as opposed to save for tomorrow. They need to import capital to fund a savings shortfall relative to investment needs, which is reflected in a current account deficit. That financing comes from Germany, Japan and the like, who have the reverse problem; they save too much and spend too little.

Put simply, the US has borrowed from the rest of the world for a long time to support an inflated standard of living. Net external debt (borrowing with the rest of the world) is more than $12 trillion.

Now, insufficient savings and macro imbalances risk being exacerbated by a blow out in the fiscal deficit as revenues collapse and spending ramps up. 

Of course, the United States consumer is also the world’s best customer.

It is hardly in the “funders” (Japan, China and et cetera) interests to cease financing the nation’s spending profligacy and see the USD go down (and their currencies go up). But common sense also says that you put your savings somewhere that retains its value. Otherwise, go chase Zimbabwean dollars.

The world faces many post covid-19 uncertainties. The path for the USD is one to keep an eye on.

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