Home Uncategorized The growth of the US dollar is a mirage

The growth of the US dollar is a mirage


Image source: Sharon McCatchon / Unsplash

In early 2021, the US dollar index fell to 89,165, the lowest level since April 2018. Since then, the index, which measures the U.S. dollar against other of the world’s leading reserve currencies, has reached higher lows and highs, recently crossing 100 levels.

The dollar index is primarily affected by the value of the euro, which accounts for 57.6% of the index, with less exposure to the Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

These reserve currencies are freely convertible and are legal tender in stable political and economic countries. The dollar is the leader because the United States is the richest country in the world with the largest economy. The U.S. currency is the benchmark pricing mechanism for most commodities because of its reserve currency status. The U.S. dollar may rise relative to components of the dollar index, however

all fiat currencies, including the US dollar, are losing value in the current global economic landscape.

The trend in the US dollar index

The reasons why all fiat currencies lose value

  • Inflation – The latest March CPI and PPI data showed the highest inflation rates since the early 1980s.
  • Faith and credit – Inflation undermines the purchasing power of fiat currencies, leading to a decline in faith in legal tender and a reduction in credit to debt-affected countries.
  • Gold, a precious metal that is a reserve asset and a historical means of exchanging and storing wealth, is just below $ 2,000 an ounce after a new record high in March 2021.

The US dollar is declining as the world’s reserve currency

  • China is releasing the digital yuan and has teamed up with Russia in an “unlimited” deal to challenge the US leadership role.
  • Russia strengthens the ruble with gold, declaring the exchange rate of one gram of gold for 5,000 rubles.
  • Some countries are abandoning the dollar to sell some goods – Saudi Arabia and Nigeria sell crude oil to China for the yuan. Russia sells oil, gas and other raw materials to Europe and other consumers for rubles. Historically, the US dollar has been the main medium of exchange for these goods.
  • US policy – The Biden administration led by Finance Minister Janet Yellen has a strong dollar policy, but a geopolitical split with China and Russia on the one hand and the US and Europe on the other means the dollar is declining as a reserve currency.

Significant implications for markets of all asset classes

  • The US dollar has been the world’s reserve currency since 1945.
  • The evolution of the fintech revolution – bitcoin, etherium and other crypto-producers have moved more towards the main means of exchange, challenging fiat currencies, including the US dollar.
  • Economic war – Russia and Ukraine are at war, but geopolitical bifurcation and sanctions have fueled economic conflict with ramifications for businesses around the world. Sanctions distort freedom of trade and affect stocks, interest rates and commodity prices as they hamper the fundamental dynamics of supply and demand.
  • Ideological dichotomy: China is the world’s leading consumer of goods, and Russia is a significant producer of raw materials. Russia will contribute “Friendly” countries and punish those who oppose its invasion. Moreover, the Chinese economy is growing and overtaking the US. China’s plans to unite with Taiwan could trigger another geopolitical crisis in the coming months and years. China and Russia are a direct challenge to the US leadership and oppose autocracy versus capitalist democracy.
  • Multinational Revenue – Increased risks for U.S. companies doing business around the world due to sanctions and deteriorating geopolitical landscape. The growth of the dollar against other world reserve currencies makes U.S. exports less attractive and could affect revenues and profits, pushing the U.S. stock market down.

Levels to view in the dollar index

  • The March 2020 high of 103.96 became the highest level since 2022.
  • Going to this level can be a gateway to much higher levels.
  • The growth of the dollar index can be a mirage – the dollar index measures the US currency against a basket of other reserve currencies. The index may continue to rise, and the dollar may continue to lose purchasing power as the index reflects half of the bifurcated world. Moreover, if all fiat currency prices fall, the dollar may continue to be the best horse in the glue factory.

Thanks for reading, and stay tuned for the next edition of Tradier Rundown!

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Stock News Contributor: Tradier Inc.

Source: Stock news

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