Opinion | Why the US dollar is only going to fall faster and harder

Given the unprecedented erosion of domestic savings, an explosive current account deficit, and the Fed determined to keep rates flat, expect the dollar to plunge by as much as 35 per cent next year

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A broken Statue of Liberty figure is seen amid glass shards outside a looted souvenir shop in New York City, after a night of protests on June 2 over the death of George Floyd. Is the world seeing the end of the aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era? Photo: AFP

Published: 5:00pm, 27 Sep 2020Updated: 7:27pm, 27 Sep 2020

The US dollar slide has entered the early stages of what looks to be a sharp descent, having already fallen by 4.3 per cent in the four months ending in August in terms of its real effective exchange rate – the index that matters the most for trade, competitiveness, inflation and monetary policy.

This recent pullback comes after its nearly 7 per cent surge from February to April, when the dollar benefited from the flight to safety triggered by the Covid-19 economic shock. But even with the recent modest correction, the dollar remains the most overvalued major currency in the world.

I continue to expect this broad dollar index to plunge by as much as 35 per cent by the end of 2021. This reflects three considerations: the rapid deterioration in macroeconomic imbalances in the United States, the ascendancy of the euro and renminbi as alternatives, and the end of the aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era.

The first factor – America’s mounting imbalances – is playing out with a vengeance. The confluence of an unprecedented erosion of domestic savings and the current-account deficit is nothing short of staggering.

For the first time since the 2008-09 global financial crisis, the net national savings rate has entered negative territory, at minus 1 per cent in the second quarter. And it did so at speed, falling by 3.9 percentage points from the previous quarter – the sharpest plunge since records began in 1947.

A person walks through a quiet Times Square in New York on August 24. At minus 1 per cent in the second quarter, America’s net national savings rate has entered negative territory for the first time since the 2008 global financial crisis. Photo: EPA-EFE

Stephen Roach

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).

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Opinion | Why the US dollar is only going to fall faster and harder

Given the unprecedented erosion of domestic savings, an explosive current account deficit, and the Fed determined to keep rates flat, expect the dollar to plunge by as much as 35 per cent next year

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