Legacy of QE policy portends long slide for US dollar

By Li Hong Source:Global Times Published: 2018/1/28 19:33:39

Illustration: Luo Xuan/GT


Despite the marked pick-up in economic momentum and a stellar spurt by US stocks, the US dollar has been on a protracted and steady road of depreciation. The euro, the yen, the Swiss franc and Canadian dollar have all jumped by a considerable magnitude.

Against the yuan, the greenback has lost more than 4 percent of its value since December 1, 2017. Lately, the world's reserve currency of choice has been heavily sold on the global currency market. At the Davos forum, US Treasury Secretary Steven Mnuchin's remarks that a weaker US dollar is good for US trade and might create other opportunities sent the currency into a tailspin.

To many market watchers, the administration of US President Donald Trump seems intent, if not determined, to pin hopes on a weaker currency to speed up US exports and reduce its trade deficits with major partners including the EU, Canada, Mexico, Japan and China. Trump has been advocating for a weaker US dollar; then President-elect Trump said: "Our currency is too strong, and it's killing us."

Unless Mnuchin or Trump himself comes out and re-asserts a "strong US dollar" policy, analysts say, the dumping of the currency by investors, organizations and even central banks, is unlikely to stop. And, whether Trump's craving for a reversal of the US trade deficit - through a drastic devaluation of the greenback - will be met is unknown.

But the Trump administration's "America First" strategy and its pursuit of protectionism has seen strong actions. Early last week, Trump imposed high tariffs on solar gear and washing machines, and higher tariffs may also loom on aluminum and steel, analysts say. His administration is also battling to change the terms of NAFTA.

The punitive US trade actions have sent shivers across the world, and market jitters are being heightened because the Trump administration plans to do much more in the area of protectionism. As a consequence, the value of the US dollar will not stop falling.

Experts believe there is another explanation to the waning of the greenback. Thanks to the US Federal Reserve's policy of "quantitative easing," which was pursued for many years after the 2008-09 financial crisis, the extraordinary expansion in money supply made the US dollar worth less. Some now claim that the US' massive money-printing to flood the world market with dollars could be about to backfire.

Had foreign governments not needed to increase their holdings of US dollars, there would have been a wave of unwanted dollars flooding around the world, experts say. As the supply of US dollars increases, the currency's value plummets.

If not for the central banks of China, Japan and a few other countries holding trillions of US dollars as reserves, the value of the greenback could dive further, experts say. In this light, the Trump administration's move to impose high tariffs on China's exports could backfire, if Chinese authorities believe their bottom line has been passed, and start to dump some of their US dollar reserves.

By contrast, experts say, the value of the yuan will remain stable. The currency may even gain some ground against its major peers in 2018, supported by China's strong economy, in particular its prowess in industrial innovation and buildup of defense capability.

Beijing's policy to rein in financial risks and its declaration for phasing in more robust opening-up measures later this year will provide more support for the yuan.

The author is an editor with the Global Times. bizopinion@globaltimes.com.cn


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