Is this the end of greenback?

The greenback has fallen against the euro by nearly 15% since the beginning of the summer.

There are also reports that Gulf Nations shifting the pricing of petroleum away from dollars.

The real causes for further fall…..

American households are saving more in order to rebuild their retirement accounts, which will make the country export more. For this to happen, the American dollar should depreciate further to make American goods more attractive to foreign consumers.

Fewer foreign purchases of US assets again imply a weaker dollar. Now for their sophisticated innovations, that the Americans specialize would mean limited foreign capital inflows.

The question is…..

What is the benchmark: Weakness against what?

Certainly not against the Euro, where it is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US. Whole European Union is reeling under bank restructuring and Bulgaria will be the first to undergo a painful restructuring under the IMF guidance.

Then not against the yen, which is the currency of an economy that refuses to grow.

But, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets like India.

Outlook:

In the longer run, OPEC will shift to pricing petroleum in a basket of currencies. Generally, it sells its oil to the US, Europe, Japan, and emerging markets alike, so it hardly makes sense for it to denominate oil prices in the currency of only one of its customers.

The bottom line is………

The dollar isn’t going to be replaced by the euro or the yen either, given that both Europe and Japan has serious economic problems of their own. Maybe, the Renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial center.

Once this zero interest rates episode end, the US Federal Reserve will be anxious to reassert its commitment to price stability then there may be a temptation to inflate away debt held by foreigners. But the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy.

The other scenario is that US budget deficits continue to run out of control. But high debts will mean high taxes. So with the combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth.

Net-net, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness.