Don't count the U.S. dollar out just yet.
LAGUNA BEACH, Calif. —A near-10% drop in the value of the U.S. dollar BUXX, -0.18% since its March high has given rise to two distinct narratives. The first takes a short-term perspective, focusing on how a depreciation could benefit the U.S. economy and markets; the second takes the long view, fretting over the dollar’s fragile status as the world’s reserve currency.
There also are indicators of lower capital inflows into the United States. House purchases by foreigners appear to have decreased again, owing in part to the U.S. government’s embrace of inward-looking policies and the related weaponization of trade and sanction measures. But the reaction has been less welcoming in the other advanced economies. Japan and eurozone member states, in particular, fear that currency appreciation JPYUSD, 0.20 EURUSD, +0.29% could threaten their own economic recovery from the COVID-19 shock.
The more the dollar’s credibility is eroded, the more the U.S. risks losing the “exorbitant privilege” that comes with issuing the world’s main reserve currency.A country in this position can exchange bits of printed paper or digital entries for the goods and services that other countries produce. It enjoys disproportionate influence over important multilateral decisions and appointments.
As has happened before, the current consensus views on the dollar will probably end up overstating the long-term implications of short-term movements. Today’s dollar weakness is neither a boon to markets and the U.S. economy nor an augury of the currency’s global downfall.
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