The US Federal System has printed a lot of unsecured dollars over the past year. Therefore, many people rightly fear an imminent strong depreciation of the dollar, and some even believe that the United States is bankrupt. In contrast to this opinion, some people continue to believe in the strength of the dollar, and in its cloudless fate.
The Strength of the Dollar
The US dollar is a measure of value for all world currencies. And it is in it that almost all countries store reserves.
For example, you can take Ukraine, where both the authorities and the population assess the hryvnia exchange rate, primarily against the US dollar. Ukraine is struggling with the strengthening of the hryvnia, China with the strengthening of the yuan, and so on.
But all that means that those countries are just saving the dollar from falling. China, Ukraine, Brazil and others will perceive the growth of their currency as a loss of the competitiveness of their countries. Moreover, with a high degree of probability, they will begin to buy out the so-called surplus currency in their Gold and Foreign Exchange Reserves. And thus they will create additional demand for dollars and the printed surplus dollars will simply settle in the gold reserves of these countries.
In addition, it should be understood that the actual collateral for the dollar is not only the US economy but the lion’s share of the world economy as a whole. For example, again, you can take Ukraine, where at the end of 2020 the monetary base was 595 billion hryvnias, while the gold and foreign exchange reserves were 29 billion in dollar terms, which was approximately equal to 800 billion hryvnia.
USD is One of the Most Used Trading Currencies
No wonder that when we talk about the USD and its future trading comes to our mind because this is a field which attracts a lot of people. Currency trading has a circulation of billions. The weakening of the dollar could well impact the process of trading – especially for beginners who are just entering the market. It comes as no surprise that the USD in correlation with other currencies is the most used pair in trading.
That’s why novice traders may have some issues to be dealing with. If this seems interesting to you, you can dive into and check this link to find out more information about the following topic.
China is Also at the Forefront
China, with more than $3 trillion in reserves, mostly in dollar-denominated assets, is also the backing of the dollar. And with China, the situation is even more interesting, since China, having in its reserves US Treasuries worth $1 trillion.
In the light of the economic confrontation with the United States, China cannot simply take and get rid of that package, because it has no one to sell such a large volume of securities, but what more important – it has almost nothing to buy on this planet for such a huge amount.
Similarities With Swiss Franc
After 2008, people bought up francs as a protective safe haven, but the Swiss economy is small and if the Bank of Switzerland did nothing, the franc would rise in value very much, which would harm the country’s economy. Therefore, Switzerland simply bought the surplus of foreign currency into its reserves, which over the past 10 years have grown from $200 billion to $1,000 billion, in dollar terms.
But the truth is in this story, the Bank of Switzerland mostly bought back the euro.
Dollar regulatory support
The financial world lives by the rules. The basis of these rules is the Jamaican monetary system, according to which the basis is the so-called reserve currencies, including the US dollar, euro, Swiss franc, pound sterling, Japanese yen. All other currencies, in fact, are derivatives of reserve currencies, because they are backed by Gold and Foreign Exchange Reserves.
Also there is a system of credit ratings of countries and standards for banking regulation prescribed in the Basel-3 agreement. It doesn’t come as a surprise that all banks keep track of their balances, which are assessed through the lens of reliability.
In the 90s, general inflation was also about 30%, and for the Western countries it was a period of economic growth.
In the 80s, inflation was 70%, and it turns out that then the dollar depreciated by 70%, but it was also a good time for the economy and the depreciation of money then did not particularly upset anyone, because in the 80s a new credit cycle was emerging.
But in the 70s, inflation in total exceeded 100% and that period of time is considered a crisis. The United States then found itself in stagflation, in which the economy did not grow, and inflation was high. During the peak period, the annual rate exceeded the 12% level.
The US Federal Reserve has been calm so far, but may end up facing an increase in inflation unarmed. Inflation cannot stop until it depreciates the overall level of debt to an acceptable level. And when this happens, the financial system will self-cleanse and be ready for the growth of a new credit cycle, as in the 1980s.
Both the economy and the dollar will continue to live on.