Is the dollar still a source of savings and investment, Or rethinking alternative safe haven asset has become an urgent necessity

In the era of Corona, in which the financial markets and global economies are witnessing continuous instances of turmoil, the process of investing money and keeping it, or exploit it has become occupying many consumers who have financial surpluses, and the solution then is in investment and trading, but how to steer these funds has always been a subject of permanent debate …

Looking Back in Time — The Dollar’s Power Emergence

The demand for the dollar has increased sharply due to the collection of gold at the end of World War II in the U.S Treasury (about three-quarters of the world’s gold accumulated in the U.S Treasury) and the application of gold exchange against the dollar in accordance with the gold standard rule and the exit of the U.S economy separately, strong due to the war and able to export a large trade surplus in its relations with the outside world. And to this came the system of the International Monetary Fund, which obliged the member states to pay 80% of their share of the fund’s capital in gold or American currency. All this made the US dollar an international currency that fulfills the functions of an international currency: a means of exchange between countries, a measure of values and also a tool for saving. Central banks have been keen to keep US dollars in reserve to cover the issuance of their national currencies, such as gold, as long as the exchange of dollars for gold is possible at any time.

Economic concepts To Remember

Before digging deeper, I would like to recall some basic economic concepts in fiscal policy so that non-economists in the public can also understand me Central banks set the basic interest rate, which is the cost of borrowing between banks, and banks and financial institutions set an interest rate on loans and savings based on this basic interest rate.

The central bank increases interest when the rate of inflation in the economy rises (an increase in the prices of goods and services) and thus makes money expensive, so that borrowing for individuals and businesses declines, spending and consumer demand decreases, and thus inflation falls. The central bank reduces interest in the event of an economic recession, making the price of money cheaper, increasing borrowing and therefore consumer spending, and the economy will recover and come out of the recession. Of course, this does not always work “as usual”. But this is conventional economic wisdom, although there are other factors that monetary authorities take into consideration when setting interest rates, but the most important is the inflation or recession index.

Interest rate effect

The effect of interest rate changes does not appear immediately, but takes about a year When the interest rate rises, borrowing becomes expensive, businesses reduce their investments, and individuals reduce their consumer spending. For example, a car loan or a home loan becomes more expensive in installments, making individuals reluctant to buy, project financing becomes more expensive, and firms reduce wages and jobs. vice versa When interest rates are lowered, cheap money for a long period of time could lead to a bubble in the economy, the more swollen it is, the more painful its collapse is. The rise or fall in interest rates is inversely proportional to the price of bonds (issued by companies and countries borrowing from the money markets).

One of the indirect effects is that Rising interest leads to a rise in the exchange rate of the currency concerned, which affects the tendency of investors away from the stock and commodity markets to the currency markets, and vice versa as well.

Dollar prices

What matters to people in the interest decision is its effect on the exchange rate. And because the dollar is a major measuring currency and many goods and services are linked to it and many currencies are also indexed to it, so the impact of the U.S interest rate can be felt by the general public as well.

As for currencies indexed to the dollar, their value increases with the increase in the U.S interest rate, and central banks in these countries often follow in the footsteps of the Federal Reserve by raising interest. Much the same. On the other hand, the price of oil, gold and other dollar-denominated commodities and metals will fall. The cost of imports increases and the competitiveness of exports decreases, leading to an imbalance in the trade balance of countries that peg their currencies to the dollar.

Factors hindering the US dollar

The repercussions of the global spread of the emerging corona virus in the form of Covid-19 have already led to an epic and sudden shift in the sense of risk from great optimism to fear since the beginning of 2020. Historically, investors’ feelings of fear have led them to prefer safe assets, such as high quality sovereign paper, precious metals and the currencies of stable and wealthy countries.

While the recent wave of risk aversion has often led to traditional expected reactions in the form of purchases in various asset classes, the recent depreciation of the dollar is an exception to what would normally be expected. The U.S dollar, as a classic safe haven currency, typically appreciates when investors face global emergencies. But what happened this time is different. Our analysis will examine the factors that led to the movement of the U.S dollar

We will now place these movements in a long-term context, keeping in mind three factors that will hold back the U.S dollar for the rest of the year and over the long term.

First, the U.S dollar has benefited from continued inflows into securities portfolios in U.S markets over the past few years, reflecting higher returns relative to markets in other advanced economies. In fact, basic models of the equilibrium value of the U.S dollar indicate that it was valued at about 20 percent in April, prior to its recent slight decline. Now that the Federal Reserve has reduced U.S interest rates to zero, there is only a slight difference in risk-free interest rates between the U.S dollar and other major world currencies, such as the euro and the Japanese yen.

Second, the economic recovery in Asia and Europe is a few months ahead of the recovery of the U.S economy, thanks to the widespread stimulus measures and the effectiveness of the measures taken to limit the spread of the virus. If this recovery continues, it is expected to result in increased asset values and returns for investors, which will support the value of Asian currencies and weaken the value of the U.S dollar.

Third, the massive issuance of U.S government debt in the coming years will put downward pressure on the U.S dollar. Foreign investors already have large holdings of U.S dollar-denominated assets and will need additional stimulus to increase their holdings. This can be done through higher interest rates, but if the Fed keeps interest rates low over the next few years (as we expect), then it may require a rate cut in terms of foreign currency value, that is, by devaluing the U.S dollar.

Dollar (USD) value/Investement, Analysis & Forecasting

It is said that you can only “touch” the present through its contact with the past and the future

The Exhibit below shows the value of the dollar against a group of other currencies from 1980 to the present . if you look carefully at the figure below, you will not find any way to invest in it, because everything is simply tied to the dollar in one way or another, whether in commercial transactions or interstate banking in general. The tricky part of it all is that it is all tied to the dollar and this happens when you look at the one asset and call it as the world reserve currency according to the remnants of the World War and the recognized agreements, which I mentioned in the introduction of the article.

Large batches of currency with interest rate to almost zero

When the market is flooded with large lots of currency and the interest rate is almost non-existent … directly, the rest of the assets, such as stocks, real estate, etc. … will continue to increase on a nominal basis. But not in real value … that is, for example, you bought stocks and they kept going up and in an instant you think you’re Warren Buffett and you got richer and richer … the truth is that you are completely wrong,so what you thought was just a curtain hiding the truth and the objective you are looking for as an investor .

In order to understand more clearly what I mean, you have to consider the comparison of the capital that has to be invested to earn the same interest over the last 25 years … Whereas in 1995 ,10-year U.S Treasury Bills were at 7.85% interest. And the average household income at that time was $33,000 … which means that investing $1 million in these bonds yielded a return on investment equal to more than twice the average income of American families. In 2019 … the average family income was $66,000 … which means that the income was higher compared to the year 1995 … but the Treasury bills of the same year with a low interest rate determined at 1.75% … which means to get the same return On investment For someone in 1995, you should, yes I say it again and again, you should invest $7 million instead of $1 million. I am sure, dear reader, that you are now beginning to understand more and more the essence of the things

Currently, with the farewell of the year 2020 and the passage of 5 days after the New Year … the Treasury interest has decreased by 1% … due to the impact of the Corona crisis on the economy, etc., This means that you have to invest an additional 2 million dollars … so that your total investment is 9 million dollars to get the same return of 78,500 dollars in 1995 from an investment of only 1 million dollars. To be understandable to traders, it would take a 28.5% return on investment in the US Treasury Bill portfolio in order to earn the same income with the same investment value in 1995. In this way, the reserves and investments of the people (countries, companies, autonomous people, etc.) disappear, which also contributes mainly to the creation of the wide economic gap and the increasing disparity of wealth between the rich and the poor.

In the years to come, the dollar will be increasingly injected into the market, but this will not cause massive inflation “Hyperinflation” as experts predicted … But inflationary stagnation “stagflation” , and this situation occurs mainly when growth stops in the world economy and prices rise … e.g. the Corona Crisis

Conclusion

we can see slight increases in the value of the dollar, especially as the U.S. economy recovers, but in general and more profoundly, the dollar is heading lower and lower.

My advice for equity investors who see the dollar as a way of savings ,to rethink and turn to gold .While, the more you earn from stocks … the more the dollar decreases over time and your money loses value…. If the standard is The trend is your friend, I would say this time gold is your friend and it will soon cross the $2000 threshold.

The question that needs to be asked is : what will be the outcome of future macroeconomic and financial system balances in light of these current findings. Is it a gradual transfer of digital currency of which developed countries compete to issue new currencies of which they will compete with the dangerous rise of Bitcoin ?

Stay tuned

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Hamid Ahtarouch

Demonstrated analytics professional with results-driven approach to work (testing, measuring, iterating)