The recent discussion on the value of the US dollar has piqued curiosity, particularly after a 5% dip since its zenith in June. Indeed, as the Federal Reserve contemplates slashing its key interest rate, various factors come into play. It’s worthwhile to understand how this shift might affect your finances and investments, whilst pondering any measures one might take in response.
With inflation looming as a significant concern, let’s delve into what a weaker dollar means. Furthermore, we’ll explore the possible economic and political ramifications through the lens of both domestic policy and the international stage.
the US dollar: from your interest to the national interest
The value of the dollar has risen consistently over the past decade. However, this might be the end of a bullish streak. Not to worry – the dollar isn’t going to vanish anytime soon. It’s expected to remain the dominant global currency for the foreseeable future. Nonetheless, many investors are preparing for a potential decline in its value.
A stronger dollar has its benefits. It amplifies the returns on US assets compared to foreign investments. Moreover, it reduces the cost of foreign goods and travel. Hence, U.S. Treasury secretaries have long advocated for a strong dollar.
Yet, things might be changing. In September, the Federal Reserve lowered its benchmark interest rate by half a percentage point, marking its first rate cut in four years. This action followed a period when the Fed’s tightening made the US the go-to place for global investors, especially with negative rates in Europe and Japan.
opinion: record-high national debt is a fiscal time bomb. Congress must defuse it.
There’s also the issue of rising national debt. Both Republican and Democratic administrations have overseen increasing deficits, even during periods of economic strength. A significant portion of this debt is funded by overseas investors. Should these investors lose interest, the value of dollar-denominated bonds might falter.
Further geopolitical factors are at play. The dollar’s dominance is partially due to U.S. military might. Countries under U.S. security umbrellas are more inclined to use the dollar in trade. However, should the U.S. reduce its military commitments, other nations might diversify away from the dollar.
US politics and foreign policy also affect the dollar
In addition to economic factors, politics influence the currency markets. For example, opinions like those of Donald Trump and Senator JD Vance favouring a weaker dollar to bolster domestic manufacturing contribute to this complex dynamic.
U.S. foreign policy, including the use of financial sanctions, has also played a role. For instance, President Joe Biden’s sanctions against Russia in 2022 highlighted a strategic shift. These sanctions, although less costly than military interventions, can incentivize affected nations to seek alternatives to dollar-centric financial systems.
Moreover, transitioning to other payment networks is costly. However, for countries like Russia or Iran, it might be worth considering, given their prolonged exclusion from the global financial system.
Despite these risks, there are reasons foreign investors may stick with U.S. assets. These include the profitability of American firms and the innovation of U.S.-based startups.
Investors can take steps to mitigate the risk of dollar depreciation. Diversifying into non-U.S. stocks and bonds is one approach. Investing in gold, whether through physical purchases or exchange-traded funds, is another.
Bitcoin: the new alternative
From our research at Grayscale, a notable option is bitcoin. As an alternative currency system based on blockchain technology, bitcoin serves as a digital counterpart to gold. According to Harris Poll, almost 1 in 5 Americans now own bitcoin, yet about 50% remain unfamiliar with it.
Bitcoin proponents view this as an indication that demand is robust and has room to grow. As more financial professionals acquaint themselves with bitcoin, it’s expected to gain prominence in diversified portfolios.
Investors seeking to hedge against dollar depreciation might also consider embracing crypto assets like bitcoin. Its fundamentals and potential for growth make it an appealing, albeit relatively new, investment prospect.
Zach Pandl contributes insightful analyses as the head of research at Grayscale, a leading crypto asset manager.
In conclusion, as market dynamics shift and political decisions impact the dollar, staying informed and diversified remains key. Whether through traditional assets or exploring new digital avenues, planning ahead can help mitigate economic turbulence.
