The demise of the dollar
The demise of the dollar
The demise of the dollar
The US dollar has really been in the spotlight recently as global markets react to all sorts of economic shifts and policy headlines. It has suffered losses this year, which has been a surprise for investors. I wanna bring in Marta Norton, Empower's chief investment strategist. Marta, great to see you.
Good to see you.
You and your team just released your q three outlook. There's a lot of great material there, but one of the things that really stood out to me was how you talk about how the dollar's performance is connected to key economic and financial factors. And it looks like there's been a really strong connection lately between the dollar's performance and both US equities and bond yields.
That's right, Vanessa. So when we're looking at historical correlations, what we find is that the US dollar has shown a strong relationship to US equity markets, the performance along with US rates. And I think that makes some intuitive sense. When we have very strong performance coming out of US equities, that's gonna attract investors from around the world. And, of course, when US bonds are offering attractive US rates, investors can get better yields there than they can elsewhere.
So with all the volatility that we've seen recently, Marta, do you think that that's keeping some investors on the sidelines and then putting more pressure on the dollar?
Well, that's a reasonable argument from my perspective. But some investors are suggesting that it's more than that. They're suggesting that the weak performance might reflect capital flows, but those capital overflows are reflecting the fact that the US is losing its status as the dominant reserve currency. Yeah.
A lot of people are talking about that. We've heard over and over that some suggest that we're seeing a bigger shift away from the US dollar. We keep hearing that theme. How realistic is that scenario in your view?
Okay. So I'm sympathetic to this view up to a point. Okay. Now we've identified five criteria that are necessary for our currency to be the dominant global reserve currency. Hang with me as I walk through them. They relate to the size of the economy, the openness, the depth of the capital markets, the stability of domestic politics, military, diplomatic power, and then, of course, prominence in international trade and finance. The US has been dominant on all of these criteria really for the past seventy five years, but we have had this rise in protectionism and the US's heavy debt load, increasingly heavy debt load, are beginning to cause the US dollar to lose some ground on some of these criteria, particularly as it relates to the openness of the economy and its political institutional stability.
There are a lot of moving pieces with all of those things that you just mentioned, Marta. So should we be worried? Should we be concerned?
Well, I mentioned I was sympathetic up to a point. It's not just an absolute thing. It's also the question of whether another currency would look better, not just on one or two of the criteria, but on all the criteria that would be required for the US to lose its dominance. And when we look at other currencies, including alternatives like Bitcoin, there just isn't anything that's well positioned across the board to take the dollar's place in the immediate future.
Alright. That's reassuring. You're making me feel a lot better here. So as we go into the second half of the year, what should we be expecting as it relates to the dollar?
Okay. Well, in our estimation, the US dollar is still overvalued even after we account for the losses that the US dollar has seen over the course of twenty twenty five. We think that makes that vulnerable to further declines even if we do see brief rallies when there's a risk off or or concerning environment like the conflict that we see in the Middle East. But for the moment, we separate kind of the cyclical performance or our expectations for continued declines from any questions related to whether the US remains the dominant reserve currency. We think it's gonna continue to act as the global reserve currency of choice for the time being. That said, the US is on notice. If it continues to increase its heavy debt load or closes its doors to the rest of the world, things could change in time.
So interesting, Marta. And great reminder that it's not just what's happening at home that matters to the US dollar, it's what's happening all over the globe as well. Absolutely. If you wanna dig deeper into Marta's research, you can find her q three outlook. There's a link below. You can also find it on Marta's LinkedIn page, online as well, or go to empower dot com. We hope you found this helpful, and we'll see you again real soon.
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