US dollar at risk of sudden collapse? Ex-IMF official warns ‘blow-up event’ could sink currency as debt mounts

A fresh stimulus package worth at least US$1 trillion could spell relief for millions of Americans in pandemic, but could raise financial stability risks

US Federal Reserve’s aggressiveness in easing financial conditions has succeeded in halting a further decline in the US economy, but that could change if major companies start going bankrupt

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The coronavirus pandemic has put additional pressure on the US dollar, driving it on Thursday to its lowest level since September 2018. Photo: Reuters

Published: 7:00am, 24 Jul 2020Updated: 9:10am, 24 Jul 2020

With the United States expected to double down on its fiscal stimulus measures to mitigate the economic fallout from the coronavirus pandemic, and the US Federal Reserve continuing its aggressive monetary policy easing, there is a rising risk of a sudden loss of confidence in the US dollar, according to a former senior executive with the International Monetary Fund (IMF).

Zhu Min, who was deputy managing director of the IMF from 2011 to 2016, said the US dollar’s position as the dominant global currency was at risk of being eroded because of mounting US government debt.

The US Congress is considering a fresh round of relief to support the US economy that is likely to cost at least US$1 trillion on top of the more than US$2 trillion passed earlier this year. Leaders of the Democratic-led House of Representatives and Republican-led Senate will have to reach a compromise on separate bills, with the House having already passed a US$3 trillion package, while the Senate is expected to pass a smaller bill of about US$1 trillion in the coming days.

“The concern isn’t whether the US dollar will see an accumulated decline of 30 per cent in the future, but whether there will be a blow-up event that causes a sudden loss of confidence in the US dollar, and its market to collapse,” said Zhu, who is currently head of the National Financial Research Institute at Tsinghua University in Beijing.

At the same time, companies have become much more vulnerable globally compared with during the 2008 global financial crisis because the low interest rate environment has sharply boosted corporate borrowing, Zhu said.