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The dollar's global leadership is in question

Real concerns began to emerge about the longevity of the US dollar as the world's reserve currency.

The dollar exchange rate in the world market has updated at least since April 2018. For the fourth month in a row, the dollar has been losing ground in the world market.

The depreciation comes amid massive monetary stimulus in the US and nervousness over the upcoming US presidential election.

But there is no one to take the place of the dollar

For the fourth month in a row, the dollar has been losing ground in the world market. The DXY index — the dollar against the six leading currencies — sank seven percent — to its lowest level since May 2018, writes Reuters.

“There were real concerns about the longevity of the US dollar as the world's reserve currency,” Goldman Sachs wrote in its review.

Growing investor anxiety was also reflected in the record growth in gold quotes.

“Gold is the currency of last resort, especially as governments depreciate their fiat currencies and push real interest rates to unprecedented lows,” said Goldman Sachs.

Affects the preferences of investors and the approaching presidential elections in the United States. In the election race, Republican Donald Trump is ahead of Democrat Joe Biden, who is viewed by the market as a negative scenario. Note that in recent days, Trump has been closing the gap.

Biden is seen as an unfriendly candidate in terms of fiscal policy. He plans to raise the corporate tax to 28 percent. This is a partial reversal of Trump's reform, which cut corporate income taxes from 35 percent to 21 percent.

In addition, Biden promised, if elected, to raise taxes for the rich — fiscal tightening awaits those whose annual income starts at 400 thousand. This will affect three percent of the richest Americans, which will not greatly affect the Democrat's ratings.

In such conditions, international investors look with great interest at the currencies of other developed countries, and primarily European ones. According to Reuters, in three months, the euro and pound sterling rose against the dollar by 10 percent and 8.2 percent, respectively.

At the same time, the dollar feels confident against the currencies of developing countries.

Investors have also begun to invest more in European and emerging market stocks. The number of managers whose weight of such shares in their portfolios exceeded the indicative level increased by 17 percentage points to 33 percent and 11 percentage points to 26 percent, respectively.

And the demand for shares of American companies has been declining for the second month in a row. According to Bank of America, the number of managers whose investment in such stocks exceeded the indicative level was only 16 percent higher than the number of those who had lower levels. Two months earlier, there were 22 percent more optimists.

The move into European assets is facilitated by the rapid recovery of the region's economies after the failure in the second quarter. In particular, according to Reuters, the German government has improved its macroeconomic forecast for the current year and expects a decline in GDP by 5.8 percent instead of the expected decline of 6.3 percent.

The depreciation of the American currency is associated with the growing volume of monetary stimulus in the United States and heightened inflationary expectations.

By mid-summer, three economic support plans were adopted, totaling over $6.4 trillion. In early August, the authorities started thinking about the fourth plan for one trillion dollars. With an active printing press and zero rates in the US, investors have lost interest in the dollar.

In addition, the losses to the US economy from the pandemic were so strong that low-interest rates may persist for a long time, said the head of the US Federal Reserve System Jerome Powell.

The main question now is whether the dollar's decline will accelerate, which could pose a threat to its hegemony. There is no alternative to the dollar, investors keep repeating year after year, noting the toughness of the Chinese position and the inherent weakness of the euro.

The dollar remains the main reserve currency (62 percent of reserves, just two percent less than in 2008), while the euro's share has declined to 20 percent from 28 percent in 2008.

Be that as it may, Stephen Roach, a Yale professor, and former Morgan Stanley executive, disagrees: in an article published by Bloomberg, he claims that “the dollar's huge privilege is coming to an end,” and predicts a 35 percent drop in its value. Natixis chief economist Patrick Arthus is also expecting a recession.

However, respected economist Nouriel Roubini, who predicted the 2008 crisis, believes that reports of the dollar's untimely demise are grossly exaggerated.

The dollar's weakness in recent times has been attributed to short-term, cyclical factors, he writes on a blog post on Project Syndicat.

In the long term, the situation looks a little more confusing: the dollar has both strengths and weaknesses, which over time may or may not weaken its global position.

If we talk about the medium and long term, then there are many factors that can help maintain the global dominance of the dollar. The dollar will continue to benefit from a broad system of flexible exchange rates, as well as limited capital controls and a liquid bond market.

“More importantly, today there is simply no obvious alternative currency that could serve as a unit of account, a means of payment and a stable instrument of savings,” the expert notes.

Despite the pandemic agony, the US has a potential annual economic growth rate of about two percent, higher than most other developed countries, where it is closer to one percent.

The US economy remains dynamic and competitive in many of the leading industries such as technology, biotechnology, pharmaceuticals, medicine, and advanced financial services, all of which will continue to attract capital inflows from abroad.

“Any country aspiring to take the US position will first have to wonder if it really wants to end up with a strong currency and the corresponding large current account deficit that arises from the need to meet the global demand for safe assets (government bonds).” — he noted.

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