The plunge in the peso was exaggerated by an unwinding of so-called carry trades during the meltdown of U.S. equities in late March. Barring a double-dip recession in the global economy, haven plays into the dollar should unwind over the balance of 2020 and into 2021, reinforcing the negative case for the dollar. And although cryptocurrencies and gold should benefit from dollar weakness, these markets are too small to absorb major adjustments in world foreign-exchange markets where daily turnover runs around $6.6 trillion.
Alas, the TINA argument doesn't stop there. The counter to my case for dollar weakness also rests on the reserve status of the U.S. currency as the linchpin of world financial markets. All trading nations, goes the argument, have to hold the dollar as the price for doing business in an increasingly integrated dollar-based world economy.
Even so, the dollar’s share of official foreign-exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the BIS. That downtrend could gather momentum in the years ahead, especially with the U.S. currently leading the charge in de-globalization and decoupling. With America’s share of reserves well in excess of its share in world GDP and trade, such a correction might well be inevitable in an increasingly fragmented, multi-polar world.
If TINA is the dollar’s only hope, look out below. America’s saving and current-account problems are about to come into play with a vengeance. And the rest of the world is starting to look less bad. Yes, a weaker dollar would boost U.S. competitiveness, but only for a while. Notwithstanding the hubris of American exceptionalism, no leading nation has ever devalued its way to sustained prosperity.
This article was provided by Bloomberg News.