Quietly And Methodically, a Mini U.S. Dollar Collapse Is Taking Place
A stealth U.S. dollar collapse is currently taking place. The dollar is on its worst losing streak in 14 years, giving a temporary boost to risk assets and the commodity complex. But will it last? Evidence suggests that it might..
August was another bearish month for King Dollar, with the value dropping 1.3%. This brings the cumulative decline to 9.4% since the end of February, as the luster of Donald Trump’s “Make America Great Again” (MAGA) economics started to wane. The U.S. Dollar Index has now declined for a sixth consecutive month, with September not looking much better.
Advertisement
Also Read: Ominous Signs of the Coming U.S. Dollar Collapse Abound
The weakness caught many investment banks by surprise. For example, Bank of America Corp (NYSE:BAC) believed that the Republican sweep in the presidential election would be most apt to provide fiscal stimulus, boosting the economy and allowing interest rates to rise over time. Both factors are dollar-bullish. They had the rate hike part right, but the dollar has continued to tank. What gives? (Source: “Bank Of America Bullish On U.S. Dollar For 2017,” TalkMarkets, January 16, 2017.)
In a nutshell, it’s a cauldron of factors. For dollar bulls, these factors show no sign of dissipating anytime soon.
For one, the Trump tax cut initiatives look less promising than they once did. Bipartisan and intra-caucus infighting have seen to that. The twice-failed Affordable Care Act repeal/replacement, which would have freed up at least a trillion dollars in economic stimulus, might be drastically watered down. President Trump is focusing on tax reform in the fall session, so good news may still await. Still, his administration been a dud if we consider expectations versus what has been accomplished already.
Economic numbers have also been mixed. For every gross domestic product (GDP) revision higher and strong employment number, there has been equal disappointment in other areas like wage growth and inflation. Simply put, the economy will not reach the much-hoped-for level of escape-speed growth. This puts pressure on the dollar, as investors sense that the business cycle is winding down. Investors know exactly what’s on the other side of economic expansion—the rekindling of monetary stimulus and quantitative easing (QE) to infinity. That’s dollar-negative. Investors are simply ahead of the curve.
More recently, Trump’s proclamation to do away with the debt ceiling certainly has dollar hawks spooked. Uncle Sam is already saddled with $20.0 trillion in debt, and 10 times that amount in unfunded liabilities. Debt ceiling negotiations were an antiquated relic of a bygone era, but at least they somewhat kept federal spending in check. If plans are carried out, investors worry that Congress will become little more than a rubber stamp for a president’s spending whims.
Will 2017 Be the U.S. Dollar’s Worst Year?
Obviously, this answer won’t be known until 2017 has passed. But two-thirds of the way through 2017, the U.S. dollar is having one of its weakest years ever. Calling this a “U.S. dollar collapse” isn’t much hyperbole. The price action downward had been relentless.
Chart courtesy of StockCharts.com
The closest comparison of dollar weakness in recent times occurred in 2003, when the U.S. dollar index crashed from 109 to 99. That period was the hangover from the Tech Bubble, and America’s first grand experiment with ultra-low interest rates.
By the end of 2003, the fed funds rate (FFR) sat at one percent, the lowest in over 40 years. Weak economic growth, falling inflation, and negligible interest rates all ganged up on King Dollar.
The dynamics today are a little different from 2003. The idea of “U.S. dollar collapse 2017” is more forward-looking than reality today. America is much further along the debt curve. When the economy turns negative, the consequences will be laid bare.
I’m not saying it’s the endgame, but the resulting fiscal stimulus to be unleashed in order to mitigate the next recession is very dollar-bearish. It will probably be much bigger than the stimulus unlocked during the Great Recession.
How Low Will U.S. Dollar Go by the End of 2017?
Is the U.S. dollar headed for a fall? I think it depends on what happens with debt ceiling negotiations in December 2017. The big question is not whether it will get raised (Trump has already bypassed Congress to do this), but whether debt ceiling negotiations will be eliminated and what process replaces it.
If debt ceiling checks and balances are removed (Congressional rubber stamp), I believe the U.S. could fall further. It would signal a failing U.S. empire, so encumbered with debt that it has lost control of any semblance of fiscal prudence. It would also signal an acceleration of deficit spending, which would hasten trading partners to strike bilateral deals to trade in other non-dollar currencies. If the world’s nations stop using the U.S. dollar in international trade, the jig is up.
Dollar collapse predictions are premature, but all eye will be focused on debt ceiling negotiations in December. The market already got a taste of dollar weakness on the rumor Trump wanted to eliminate the debt ceiling. If he actually does it, without a credible alternative process, the weakness will become a torrent.
After all, the dollar cannot remain the world’s reserve currency for long, if profligate spending rules the day.
