It certainly hasn’t been a good year for the US Dollar. The American currency has depreciated in value in relation to various currencies. For instance, the EUR/USD pair began the year at 1.40430 and is now at 1.50910. The USD/JPY pair has fared similarly as it began the year at90.45930 and is now at 87.90750.
Earlier today, Wang Xiaoyi, vice director of China’s State Administration of Foreign Exchange, stated that the depreciation of the US. Dollar is a long term trend. He’s not the only one to believe this is the case. Israel’s Central Bank Chancellor, Stanley Fisher stated that the world needs to get used to a weaker dollar. This is one effect of the global financial crisis and the mess that America is in.
Basically, the pressure on the dollar is the result of the enormous deficit which the US is weighed down by. The US administration (under Bush and Obama) injected the economy with huge sums of money. This has to come from somewhere, so the printing presses in Washington have been working overtime, churning out more and more Dollars.
As always, the more there is of something, the less it tends to be worth. In addition, the FED has kept the US interest rates at super low levels while in some countries, interest rates have begun to inch upward. A lower interest rate means that you can get less of a return if you have a ban deposit in Dollars or holding Bonds and other Dollar quotes assets. It makes other currencies far more attractive than the Dollar.
As the deficit and fragile state of the economy may take years to correct, the USD may be headed for a long term downward trend.
But it’s not all bad news for the Dollar, as Wang Xiaoyi added that there has been no major change to China’s investment strategy for its foreign-exchange reserves (full announcement here). China has in its forex reserves more than $2.27 trillion. It is basically the biggest American debt owner on earth. And it is continuing to grow its reserves, meaning that the chinese do have faith in the dollar. However, whether this is strictly an economical decision or based also on political interests is anyone guess.
The consensus seems to be that the dollar has not seen the end of its troubles yet.
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