Stephen Roach

The View | How the coronavirus may deliver a shock to the US dollar

US domestic saving, already depressed, is headed deep into negative territory. This is likely to lead to a record current-account deficit, and the US could see a 35 per cent dollar plunge over the next two to three years

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Thanks to the US dollar’s “exorbitant privilege” as the world’s dominant reserve currency, US borrowing is normally funded on extremely attractive terms – but this may be about to change. Photo: Reuters

Stephen Roach

Published: 3:00am, 25 Jun 2020Updated: 3:33am, 25 Jun 2020

Pandemic time runs at warp speed. That is true of the Covid-19 infection rate, as well as the unprecedented scientific efforts to find a vaccine. It is also true of transformational developments playing out in pandemic-affected economies.

Just as a lockdown-induced recession brought global economic activity to a virtual standstill in a mere two months, hopes for a V-shaped recovery are premised on an equally quick reopening of shuttered economies.

It may not be so simple. A sudden stop – long associated with capital flight out of emerging markets – often exposes deep-rooted structural problems that can impair economic recovery. It can also spark abrupt asset-price movements in response to the unmasking of long-simmering imbalances.

Such is the case for the pandemic-stricken US economy. The aggressive fiscal response to the Covid-19 shock is not without major consequences. Contrary to the widespread belief that budget deficits do not matter because near-zero interest rates temper any increases in debt-servicing costs, in the end there is no “magic money” or free lunch.

Domestic saving, already depressed, is headed deep into negative territory. This is likely to lead to a record current-account deficit and an outsize plunge in the value of the dollar.

05:55

What if Covid-19 is here to stay? Why we may need to prepare for the coronavirus becoming endemic

No country can afford to squander its saving potential – ultimately, the seed-corn of long-term economic growth. That is true even of the United States, where the laws of economics have often been ignored under the guise of “American exceptionalism”.