The impact of political uncertainty and the mismanagement of the Covid-19 crisis is evident on the value of the US dollar, which has plunged since last March. How did the "green currency" reveal the weakness of the United States?

Writer Arnaud Le Parmentier said in the report published by the French newspaper Le Monde that when major crises occur, the dollar is usually used. However, what is happening today is different.

Since last March, this currency has lost 12% of its value compared to the euro, falling from $ 1.06 against one euro to $ 1.19 at the end of July. The decline reached 5% last month.

Is the pace of collapse accelerated?

Years ago, investors indicated on several occasions that "there is no choice" except for the dollar, which is still the reference reserve currency and constitutes 62% of reserves (its share decreased by only two points compared to 2008) at a time when the euro’s share of 28% to 20% since 2008.

An extravagant privilege

The writer quoted Stephen Roach, a professor at Yale University and former CEO Morgan Stanley, as saying, "The exorbitant concession of the dollar is nearing the end" and predicted a 35% decline in this currency, while Patrick Artus, chief economist at Natixis, expects a slide in the dollar.

There are many explanations for this, according to the author, as the United States prints more money than other countries. The budget deficit is expected to reach 23.8% of GDP in 2020, which is twice what the deficit in the euro area (11.7%) would reach, according to the IMF projections.

Added to this was the policy of the Federal Reserve System, which lowered interest rates more than the European Central Bank, and was thus no longer able to withstand negative interest rates.

Currently, short-term US key interest rates range from 0 to 0.25%. The Federal Reserve System intervenes intensively, by purchasing US corporate bonds, to formally ensure market liquidity, with the aim of realistically avoiding bankruptcy.

Since last March, the dollar has lost about 12% of its value compared to the euro (Reuters)

In addition to the lack of confidence in the market, there are many political doubts, centering on chaos in the United States and the inability to control the Covid-19 epidemic, as well as the program of Joe Biden, the Democratic candidate for the presidential elections scheduled for November, which is expected to raise taxes on companies , Imposes a Social Security tax on the rich. These events occurred in the context of a large trade deficit and a structural shortage of savings, the author says.

European reaction

The writer explained that three other external factors threaten the dollar. First, unlike the 2008 financial crisis, the eurozone responded quickly to the crisis by launching an economic recovery plan. Typically, European savings fund US Treasury bonds. From now on, it will be directed to Europe, which automatically weakens the demand for the dollar.

Secondly - the writer adds - China continues to press ahead with economic development despite the trade and technological war that is going on between it and the United States. There is also the propensity factor to emerging markets.

According to the writer, a new phenomenon coincided with the slide of the dollar, represented by the rise in the price of gold, as well as non-governmental currencies, such as the Bitcoin currency, whose value has increased by 55% since the beginning of the year.

This explains why, in a world where central banks and nations are pumping currencies intensively, it is imperative to find safe havens. This market is symbolic, as central banks own 33 thousand tons of gold, which makes it impossible to return to the gold standard, as the writer states.

Operators are also relying on debt liquidation, which may lead to asset inflation, which can be seen in surprisingly high-priced stocks, as well as real estate. Also, the phenomenon of stagflation, which is the occurrence of inflation associated with recession, cannot be excluded, just as it happened in the 1970s, where the cost is the result of losses in productivity due to Covid-19, the writer concludes.