Muhammad Zamir
Asadi
The
value of US Dollar is highly likely to go through a downward cycle in the next
few years considering the pressure from both fiscal and current account
deficits and an anticipated combination of an expansionary monetary policy and
restrictive fiscal policy in sight, according to a research report on the mid-
and long-term trend of USD published Monday by KTrade Securities, a stock and
commodity brokerage in Pakistan.
The
report, by giving a critical review of the dominance of USD in global foreign
exchange and a technical analysis on the current international dynamics in
trade, oil, and other geopolitical and economic factors shaping the value of
USD in the long term, notes the absence of two key drivers of growth seen in
the US in 2023: the unprecedented surge in the US fiscal deficit, and the
depletion of surplus savings. As a result, growth is projected to slow as
consumption decelerates and business investment weakens, dragging down US
economy.
“This
trend aligns with the estimations of broader market participants, who foresee
the U.S. Dollar Index (DXY), a measure of the value of the U.S. dollar against
a basket of six major currencies, declining to 96-96.2 by 2026-28F from its
current level of 102.4”, the report points out, noting that as direct and
secondary sanctions implemented by the US administration increase the risks of
holding assets or raising finance in US dollars, central banks and policymakers
look to diversify away from the US dollar for international financing.
“The
message is quite loud and clear”, said Ali Farid Khwaja, Chairman of KTrade
Securities.
“The
use of the US dollar as a tool to print money or control its reputation comes
at the risk of the Global South and the use of it as a policy to implement
sanctions has been the most damaging factor as 28% of the GDP of the world is
under sanctions, which is big enough for these countries to start thinking
about using their own currency”, he said.
According
to IMF statistics, the share of US dollar held by central banks as foreign
reserve is at its lowest level in 28 years. People’s diminishing confidence in
and prospective decline of USD go along with hiking gold prices, even with the
expectation of delayed rate cuts after an overachieved CPI of 3.5% released
last week.
“The
rise of the US economy is based on its practice of and people’s belief in its
free markets. Unfortunately, the recent political measures, such as
protectionism, trade obstructions as well as infringement of corporate property
are breaking the whole fundamentals. Today, if I am a country, if I am one of
another emerging markets in Global South, I’ll be worried if I will be the next
Russia or face the same kind of trade barriers as China is currently facing”,
he further remarked.
Despite
of the glittering labor market in the US as nonfarm payroll increase in March
hit the highest in a year, which again dampened people’s expectation for rate
cuts, long-seated problem are still there, likely to compel the Fed to
implement interest rate cuts and start monetary easing sometime within the
year: The US Treasury's funding of pandemic-related deficits involved issuing a
large number of T-bills; and the Fed's aggressive interest rate increases and
payments on large reserve balances further contributed to this policy mix.
“T-bill
issuance has increased by 125% since 2019, and reserve balances are up by 118%.
And the Fed's target rate is 125% higher than in 2019. Therefore, interest
payments on T-bills and reserve balances, together, are putting pressure on US economy
which will prompt the Fed to ease its stance over monetary policy in the next couple
of years”, according to the report.
The
report indicates that with a depreciating USD, emerging economies will take
benefit. In terms of financial mechanisms, the availability of global liquidity
and relaxed financial conditions during a weakening USD are advantageous for
financing in emerging markets.
The
already-exorbitant prices of gold and bulk commodities, on the other hand,
could continue to stay high as central banks are diversifying away from dollar
to alternative systems and countries are striving to become self-reliant or
competitive in terms of the green transformation amid disrupted global supply
chain.
“Real
money investors may quickly adjust their investments by favouring longer-term
bonds. Additionally, retail investors might prefer the higher yields of longer
maturities over bank deposits or T-bills”, the report analyzes.
“You
don't try to fight the market in the short term, though. In the election year, the government will keep a
pro-growth approach, which will help stocks in the short term. In the longer
term, this is very dangerous as high inflation leads to further polarization in
society and the disparity between the rich and the poor eventually leads to
collapse in the economic system”, Ali Farid Khwaja said.
(Asadi is a journalist based in Pakistan)