- The Washington Times - Wednesday, July 29, 2020

Even the greenback is looking a little green these days from the COVID-19 pandemic.

Battered by a global recession and investor fears that the U.S. economy may be facing an especially difficult time, the U.S. dollar has fallen 9% from its March high and is on track for its worst month in July since the summer of 2011.

By contrast, gold — long seen as a haven for investors in troubled times — has been setting price records in recent days. It reached a new closing high of $1,931 an ounce Monday on Wall Street. Given global uncertainties, gold could rise another $1,000 an ounce in the coming months, analysts at Bank of America Global research say.

The dollar is down about 3% for all of 2020 after rising in each of the past two years in lockstep with the U.S. economy. In the past three months, however, the dollar has fallen 5.1%.

“The dollar is very vulnerable now,” Boris Schlossberg, managing director of G-10 currency strategy at BK Asset Management, told the financial publication MarketWatch last week.



The dollar’s decline cuts both ways for the Trump administration as it seeks to jump-start an economy devastated by pandemic-related shutdowns. Imports become more expensive, but a weaker dollar makes U.S. exports more competitive abroad. President Trump’s sharp focus on U.S. trade balances and the trade deficit with rivals such as China could be helped by a weaker dollar.

But the decline has also inspired talk that the U.S. dollar’s privileged position as the global “reserve” currency may be in serious question for the first time since the end of World War II.

“Massive [government] spending and general lack of allure of the U.S. dollar could be … more of a threat to the dollar than people appreciate,” Mr. Schlossberg said.

An analysis by Goldman Sachs this week stirred speculation about the dollar’s long-term ability to remain the world’s undisputed reserve currency.

As the Federal Reserve prints dollars to buck up the economy and as lawmakers on Capitol Hill debate trillions of dollars more in fiscal support, “real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge,” the Goldman Sachs analysis warned.

“Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows.”

“The resulting expanded balance sheets and vast money creation spurs [dollar] debasement fears,” Goldman strategists said.

Some argue that strains exposed by the pandemic could encourage policymakers to rethink the value to the U.S. of being the world’s de facto backstop banker.

Past predictions of the dollar’s fall have not been borne out, but economists Simon Tilford and Hans Kundnani, writing this week in Foreign Affairs, say the “exorbitant privilege” comes with an “exorbitant burden” that Washington may soon no longer want to bear.

“Even if much of the rest of the world wants the United States to maintain the dollar’s role as a reserve currency — just as much of the world wants the United States to continue to provide security — Washington could decide that it can no longer afford to do so,” they wrote.

The dollar’s long dominance, they add, has helped U.S. banks and capital markets but has hurt manufacturers and workers in industrial-heavy states — a key focus of Mr. Trump’s economic agenda.

“Given these mounting economic and political pressures, it will become increasingly difficult for the United States to create more balanced and equitable growth while remaining the destination of choice for the world’s excess capital, with the overvalued currency and deindustrialization this implies,” Mr. Tilford and Mr. Kundnani say. “At some point, the United States may have little alternative but to limit capital imports in the interests of the broader economy — even if doing so means voluntarily giving up the dollar’s role as the world’s dominant reserve currency.”

The Trump administration is banking on a quicker-than-expected rebound in the U.S. economy overall, which could bolster faith in the dollar. The Federal Reserve’s policy statement Wednesday and the looming jobs number report are expected to provide insights into the dollar’s future.

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