Monday, May 30, 2011

The long-term trend in the dollar is down

The dollar has had a nice bump higher, but the long-term trend for the dollar is still lower. This is a trend that has been occurring since the mid-1980's. There are four reasosn for the strong negative trend and there is little that the US can do to stop this process.

The ascent of emerging markets -

The growth and wealth creation engine has moved to emerging markets from the developed world. A key catalyst was China joining the WTO in 2001. China joined the global economy. India joined the global economy and a host of other nation have improved their competitiveness relative to the rest of the world. the result has been higher growth and wealth creation that is almost unprecedented on its speed and size. The non-OECD countries now represent half of global GDP. Emerging markets are running trade surpluses relative to the developed world and productivity is improving for their export goods. Factor equalization is occurring.

The US can improve its trade and increase its exports with a dollar decline and productivity increases, but the trend for GDP to be generated in non-developed countries will not change radically. Trade between countries away from the US is also increasing which means that dollars may be less likely needed.

The end of the "Washington Consensus" -

Policy solutions and economic liberalism will not be coming from developed countries. The EM are looking to find alternative policy approaches. The idea that the World Bank or the IMF will call the shots on international financial policy has ended. This is simply a matter of voting blocks. The EM will have more votes on the IMF. The developed world and the US will have less, so coalitions without the US may be able to be formed. There already is the view that EM will not be dictated policy in a crisis like in the 90's. This means it will be harder for the US to impose its policies around the world.

The end of dollar "exceptionalism" -

Central banks around the world have moved to diversify away from the dollar. There has been a general move to hold more Euros, but this has not been an easy choice given the sovereign crisis. It has meant that gold is being purchased by many central banks. Certainly, there is less reason to sell gold from central bank vaults.

The global imbalance -

The US will continue to be a major net debtor.The EM will be major net creditors. The imbalance is being reduced but will still require structural changes which are not dollar positive. The dollar will have to decline to allow for trade improvement. US savings rates will have to increase which means that growth will have to be slower relative to other countries. In this world, the US will be less likely to take currency leadership role.


The dollar will not always go down, but the economic power structure means lower US dominance - a multi-polar finance environment.

No comments: