Will we witness a US dollar crash in 2021? Many experts foresee
this event. However, it is important to remember that the world’s most used currency still maintains some strong advantages.
Why Experts Are Concerned
Just this March we were celebrating a historic high in the value of the dollar, but today the value of the currency has fallen off by 5%, according to the Dollar Index. Some of this may be a natural readjustment, but it’s fair to say that the global pandemic had a little something to do with it. Right now, some doomsayers are predicting a dire future for the currency. Economist Stephen Roach believes a 35% crash in the value of the dollar is “virtually inevitable.” Roach and other experts warn that the problem is not only related to the pandemic.
They point to serious problems with the fundamentals of the economy. In particular, the national savings rate (the sum savings of individuals, businesses, and government) is now in the red for the first time since the Great Recession – read more about the Great Recession at Debt free adventure. This alludes to the fact that current rates of spending are out of hand and could lead to inflation. Roach says that when this occurs there is a lack of savings, he states: “We run these current account deficits to borrow surplus saving, and that always pushes currencies lower.”
Not Everyone Agrees
Other experts simply believe the dollar has been overvalued for quite some time, and a decrease is natural. It is not necessarily a sign of impending doom—see some more information from FXEMPIRE. In a poll of top currency and finance analysts, about 80% of respondents predicted that given current trends it was likely that the dollar would trade close to current levels throughout the year. It could even go up. The vast majority of those polled believe a second global COVID-19 outbreak during the year would even boost the currency. In addition, 90% of respondents believed that international instability, as long as it did not focus specifically on the United States, would see investors crave the safety provided by the reliable currency. Another argument for continued dollar stability is its status as the currency of international finance and trade. Through its international standing, the dollar is used too often and enjoys too many structural advantages to utterly collapse.
The Global standing of the dollar is not changing anytime soon. The Bank of International Settlements reported this year that global US dollar-denominated debt is higher than it has been in recent years. Meanwhile, developing country dollar debts have risen to an all-time high. Even China’s dollar-denominated debt has increased by 35% over the past five years. Optimists also point out that the dollar has only weakened significantly to the Yen and Euro. When compared to most other currencies, the U.S. one has remained stable or gained value. See the change in the exchange rate between the dollar and the Euro below. They also point out that in a pandemic induced global slowdown, the other major currencies are also liable to see currency value loss, tempering dollar losses by comparison.
What Does This Mean for You?
If the dollar collapsed as the prophets of doom are predicting, it would have severe consequences for your life. In countries like Zimbabwe, which experience extreme cases of currency collapse, lifetime savings were wiped out virtually overnight. As the currency became worthless, a black market emerged which replaces the regulated one in its primary importance.
What is far more likely is a considerable devaluation of U.S. currency in the 8-25% range. The most likely negative consequence of this outcome is an increase in prices, as it costs more U.S. dollars to buy foreign products. There may also be inflation as a result of a weak dollar. This will make the problem worse. Unfortunately, you will see the difference at the Walmart checkout. You may also find it is far more costly to vacation abroad, as your money will not go as far overseas. But there are some positive sides to this process. Many countries devalue their currency intentionally. With a
cheaper dollar, American products are more competitive abroad. This could bring more jobs and more money to American corporations. This could make it easier to remain employed or
get a raise (a devalued raise, but still!).
Unanswered Questions Remain
The problem with all of these predictions is that some of the most important questions remain unanswered. The prospects of continued and
recurring shutdowns and increased job loss due to the pandemic are weighing heavily on the value of the currency. If a successfully tested and properly distributed vaccine circulates early in the year, it could significantly improve the prospects of the currency.
When COVID-19 is no longer scaring the bejesus out of investors and consumers, confidence in the U.S. economy will naturally increase. It will also allow the economy to resume at least an approximation of its normal state. Right now, economic uncertainty is coupled with political uncertainty (as always). Lack of clarity surrounding the upcoming elections is scaring investors off the Dollar. It is not only the normal question of not knowing who will win the Presidency, Senate, or House. Due to the statements of the President and previous interference by foreign powers, there are also concerns over the very integrity of the elections. These factors mean that a messy and unclear election result could see the dollar slump.
Another factor is China. Recent “trade wars” aside, the United States and China remain, forgive me for the metaphor, co-dependent partners in a dysfunctional relationship. A recovery there will increase demand for American products, which will benefit the demand for the dollar.
A lot remains unclear, but panicking is inadvisable and probably unnecessary. The dollar may lose some value but a full-on currency apocalypse is probably not in the cards. Even if our currency is devalued more significantly, we may benefit from the process. Most important,
even in the current economic climate, a zombie apocalypse remains unlikely…So, we got that going for us.