The U.S. Dollar has become the most valuable currency in the world. The strength of the US dollar has helped Americans prosper. Imports will be less expensive if the greenback is highly valued. To increase profits, companies may consider outsourcing production. To increase their profits, they can use cheap labor from other countries rather than paying American workers high wages. Outsourcing is better for investors because it results in higher stock prices and higher dividends. Globalization was clearly a good idea until the Covid-19 pandemic which disrupted supply chains, caused logistical bottlenecks and made it difficult to access capital. This is something investors need to consider.
Americans have relatively low imports so their imports have increased. However, exports from the USA are not keeping up. The problem is that American production is more costly due to the high dollar’s cost. This causes an increase in imports as well as outsourcing. These finished goods are then shipped to the U.S. at low prices to be sold in retail. Certain industries, like medical equipment and weapons can maintain their global position. Because of their large defense budget, weapons manufacturers can be a great investment. With the conflict in Ukraine, there is a huge opportunity for the weapons industry.
Due to the huge deficit in the trade balance, large amounts of dollars end up in foreign hands. Foreign entities can purchase U.S. Treasury paper. China and Japan both have large amounts of U.S. government bonds. The monetization can also help to reduce federal budget deficits. The Fed bought Treasury paper and had a balance sheet of more than $9 trillion. To curb inflation, the Fed raises interest rates. This has made American debt attractive to the international market. This has led to the stronger greenback in Forex markets. Contrary to popular belief currency appreciation in Forex markets is caused by high U.S. Inflation. As more dollars are circulated worldwide, the trade deficit will rise and imports remain low.
These conditions will ensure that the U.S. dollar will continue to be the world’s preferred currency. It would be foolish for investors to convert dollars into Euros. The Euro is now almost equal to the U.S. dollars and has fallen against it. Other fiat currencies also have lost value relative to dollars. The Japanese Yen has also declined in value against the dollar. A great article can be found on the dominance the dollar has over the Euro and Yen. (The Dollar Dominance Reducing The Yen And Euro Despite Our Inflation.
The Swiss franc has done well, and the Russian ruble has not been impacted by the sanctions imposed after the Russian invasion.
The strong dollar is a powerful tool that can help Americans prosper. It becomes more risky to make investments in fiat currencies overseas as the greenback increases and other currencies fall against it. Currency depreciation could be a threat to the United States, which is heavily dependent on imports. For several reasons, investors should be attentive to the health of the dollar. It is vital to monitor the strength of the U.S. dollar.
How the US weaponized its currency
It’s not unusual to use the currency for weapons. The United States placed sanctions against Venezuela, Iran and North Korea. One could argue that North Korea, Cuba and Iran are not economically important and that the sanctions would have no effect on the US dollar. The dollar’s dominance is not threatened by Iran or Syria. Venezuela is a country that has a lot oil but is also very poor economically. Russia, a nuclear power, is another story. The Russian attempts to subvert the Russian economy by imposing sanctions to force them to halt their military operations in Ukraine have not succeeded, it seems. Russia now demands payments in rubles to purchase oil and gas. This has resulted in the remarkable strength of the ruble on Forex markets.
Russia and China have also been affected by the weaponization of their currency. They have grown closer to one another and increased their trade. These trades tend to avoid the U.S. dollar as a currency. Chinese and Russians have developed payment systems that eliminate the U.S. dollar. Dollar demand falls as a result. The idea of bilateral trade agreements between countries that allow them to avoid dollars could threaten dollar dominance. Russia and Turkey reached an agreement to stop the U.S. Dollar being used in trade.
It seems countries might try to avoid the dollar system and weaponize their currency to escape the negative influence of America on foreign policy.
Dollar Losing Dominance as Global Trade Currency
Seeking Alpha contains several articles written by this author about the dollar. Seeking Alpha allows you to search WWS Swiss Financial Consulting SA. The growing federal debt, which now exceeds $30.6 trillion, federal budget deficits, large trade deficit and inflation are all threatening the currency’s trustworthiness. Due to currency’s weaponization, many countries have tried to avoid U.S. dollars. This includes Russia and China. Despite the sanctions, Iran was able to sell its oil. If other countries do not use the dollar financial system, dollars will be less popular on Forex markets. The rise of Eastern economies will likely overthrow the dominance of dollars. It remains to be determined.
The petrodollar is a key component of global finance and the Saudi Arabian position is critical to dollar dominance. Forex markets will experience rapid changes if the Saudis are prepared to pay in another currency for oil and gas. Because dollar dominance in global finance does not last forever, and there are positive developments that could change the situation.
You can speculate on what would happen if the U.S. dollar were to lose significant value. Imports will be more expensive. It will take many years for goods to be returned to the United States. It takes capital and time to regain market share. Foreign investors would find it difficult to invest in the U.S. due to hyperinflation and rapid decline of Forex markets. This could lead to more monetization and higher inflation. The federal debt might be unfinanceable and the government could default on Treasury debt. We hope this does not happen.
How investors can hedge against the dollar’s depreciation
This topic is very complex and should be addressed in a separate article. Because there are so many variables, investors might not be worried about the future. If Russia and China actually work together to create a central bank digital currency (Central Bank Digital Currency), based on gold, the U.S. might not have any problems. The Government holds over 8,100 tonnes gold. The U.S. dollar would remain dominant if the Fed issued a CBDC that is based on gold. As hedges against the fall of the dollar, physical gold, stocks from gold mining companies, and stocks from royalty companies are all options.
Commodities are risky investments. It is important to take care before you risk your money. Unexpected outcomes can be caused by commodity trading. It appears that food will be more expensive, while oil will remain in high demand.
Real estate can be a way to protect your wealth in an inflationary world. Before you invest in REITs, it is worth looking into. It is vital to do thorough research on the company in order to establish if it has a strong foundation.
To preserve their wealth, investors will need to do more. This is not the best way for investors to move ahead