Since March, the world’s reserve currency Dollar has experienced a devaluation of 10% due to the pandemic Covid-19 which has shaken the whole US economy. However, the current scenario holds two portrayals. If we look at the short-term perspective, the US can benefit through increased demand in their export markets. It would further lead to economic growth. Nevertheless, the long-term perspective does not create a positive impact on the future of the US economy. Its fragile state has questioned its stability and credibility as a world’s reserve currency.
Several factors accrue to the devaluation of the world’s strongest currency. The US Federal Bank has recently eased its monetary policy after analyzing the downfall of the economic state. As a result, earnings from US government bonds have decreased, investments have lost its attractiveness and the competition enlarged. This has been in the form of a shift towards emerging markets and Europe. Jakobsen, chief economist, and CIO at Saxo Bank said;
“Monetary policy has reached the end of a very long road and has proven a failure,”
Crumpling of the US dollar and economy!
The strict policies of the US government regarding trade and sanctions have led to a decline in capital inflows into the country. Foreigners are reluctant to buy properties in the US reducing the FDI (Foreign Direct Investment).
Some countries like Turkey and Lebanon have faced much rigid exchange rate depreciations but still, their currency has become stronger against the dollar. Most countries of the developing world have benefitted greatly from a weakening state of Dollar. It has given them the opportunity to implement stronger fiscal and monetary policies that would help them in boosting up the domestic economy. This is because Dollar’s depreciation has led to reduced import prices and more scope for their export sector. On the other hand, the US currently is facing a rise in its import prices. Jakobsen further said;
“In a global system of failed monetary policies and a long and difficult path to fiscal policy, there is only one other tool left in the box for the global economy and that is lower the price of global money itself: the U.S. dollar,”
The long-term view of the state of Dollar is not an all positive outcome. Further depreciation of the currency will damage its credibility and may put the country’s global status at stake.