Research report highlights declining trend of USD


Muhammad Zamir Asadi

The value of US Dollar is highly likely to go through a downward cycle in the next few years considering the pressure from both fiscal and current account deficits and an anticipated combination of an expansionary monetary policy and restrictive fiscal policy in sight, according to a research report on the mid- and long-term trend of USD published Monday by KTrade Securities, a stock and commodity brokerage in Pakistan.

The report, by giving a critical review of the dominance of USD in global foreign exchange and a technical analysis on the current international dynamics in trade, oil, and other geopolitical and economic factors shaping the value of USD in the long term, notes the absence of two key drivers of growth seen in the US in 2023: the unprecedented surge in the US fiscal deficit, and the depletion of surplus savings. As a result, growth is projected to slow as consumption decelerates and business investment weakens, dragging down US economy.

“This trend aligns with the estimations of broader market participants, who foresee the U.S. Dollar Index (DXY), a measure of the value of the U.S. dollar against a basket of six major currencies, declining to 96-96.2 by 2026-28F from its current level of 102.4”, the report points out, noting that as direct and secondary sanctions implemented by the US administration increase the risks of holding assets or raising finance in US dollars, central banks and policymakers look to diversify away from the US dollar for international financing.

“The message is quite loud and clear”, said Ali Farid Khwaja, Chairman of KTrade Securities.

“The use of the US dollar as a tool to print money or control its reputation comes at the risk of the Global South and the use of it as a policy to implement sanctions has been the most damaging factor as 28% of the GDP of the world is under sanctions, which is big enough for these countries to start thinking about using their own currency”, he said.

According to IMF statistics, the share of US dollar held by central banks as foreign reserve is at its lowest level in 28 years. People’s diminishing confidence in and prospective decline of USD go along with hiking gold prices, even with the expectation of delayed rate cuts after an overachieved CPI of 3.5% released last week.

“The rise of the US economy is based on its practice of and people’s belief in its free markets. Unfortunately, the recent political measures, such as protectionism, trade obstructions as well as infringement of corporate property are breaking the whole fundamentals. Today, if I am a country, if I am one of another emerging markets in Global South, I’ll be worried if I will be the next Russia or face the same kind of trade barriers as China is currently facing”, he further remarked.

Despite of the glittering labor market in the US as nonfarm payroll increase in March hit the highest in a year, which again dampened people’s expectation for rate cuts, long-seated problem are still there, likely to compel the Fed to implement interest rate cuts and start monetary easing sometime within the year: The US Treasury's funding of pandemic-related deficits involved issuing a large number of T-bills; and the Fed's aggressive interest rate increases and payments on large reserve balances further contributed to this policy mix. 

“T-bill issuance has increased by 125% since 2019, and reserve balances are up by 118%. And the Fed's target rate is 125% higher than in 2019. Therefore, interest payments on T-bills and reserve balances, together, are putting pressure on US economy which will prompt the Fed to ease its stance over monetary policy in the next couple of years”, according to the report.

The report indicates that with a depreciating USD, emerging economies will take benefit. In terms of financial mechanisms, the availability of global liquidity and relaxed financial conditions during a weakening USD are advantageous for financing in emerging markets.

The already-exorbitant prices of gold and bulk commodities, on the other hand, could continue to stay high as central banks are diversifying away from dollar to alternative systems and countries are striving to become self-reliant or competitive in terms of the green transformation amid disrupted global supply chain.

“Real money investors may quickly adjust their investments by favouring longer-term bonds. Additionally, retail investors might prefer the higher yields of longer maturities over bank deposits or T-bills”, the report analyzes.

“You don't try to fight the market in the short term, though. In the  election year, the government will keep a pro-growth approach, which will help stocks in the short term. In the longer term, this is very dangerous as high inflation leads to further polarization in society and the disparity between the rich and the poor eventually leads to collapse in the economic system”, Ali Farid Khwaja said.

(Asadi is a journalist based in Pakistan)

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