The greenback is off to a terrible start in 2018. The U.S. Dollar Index, which measures the U.S. dollar against a basket of foreign currencies, is at $0.8889 and has fallen roughly 3.5% since the start of 2018. Over that same time frame, the pound sterling has advanced more than five percent and the euro-to-dollar rate is up 3.5%. To put that into perspective, this is the worst start for the U.S. dollar in 21 years. After some momentum in the second half of 2016, the U.S. dollar has continued to tumble.
Since January 2017, the month Donald Trump entered the Oval Office, the U.S. dollar has plunged approximately 10.8%. Over the last 12 months, the pound sterling has gained 14.6% while the euro-to-dollar rate has soared 18%.
The greenback’s losses shouldn’t be a total surprise. A number of analysts have been warning for months now that the U.S. dollar would continue to fall and that the carnage is not yet done.
Yes, the American economy has a lot of momentum, but concerns about President Trump’s trade policies, recently imposed tariffs on imported solar panels and washing machines (mainly targeting China), political discord in Washington, and the Federal Reserve’s monetary policies and interest rates could trigger a U.S. dollar collapse.
On top of that, strong economic growth around the world has made the U.S. dollar less attractive. The eurozone is coming off one of its best years economically in a decade. And economic growth in the U.K. has been stronger than expected.
This has many wondering if U.S. economic growth is starting to peak and whether or not it makes better sense to invest elsewhere. This might explain why investors are selling the U.S. dollar and U.S. Treasury bonds at the same time.
Could Euro Replace U.S. Dollar as an International Currency?
One big reason why the U.S. dollar tumbled in 2017 was the euro’s strength. The eurozone, which is the largest economic region in the world, had one of its best years economically in a decade.
Investors, not wanting to miss the boat, poured their money into the euro. This sent the U.S. dollar reeling. In 2017, the U.S. dollar fell by more than 12% against the euro. Again, many financial institutions expect the U.S. dollar to continue to slide in 2018.
The big question is, how low will the greenback go? And if the greenback falls too far, will investors want to see the U.S. maintain its reserve currency status? Is it possible that the euro could replace the U.S. dollar as the new world currency?
If any currency were to replace the U.S. dollar as an international currency, it would most likely be the euro. The value of euros held by foreign countries is on the rise while holdings of U.S. dollars in foreign central banks are falling.
China is the largest investor in U.S. dollars. In November 2017, it held $1.17 trillion in U.S. Treasury Securities. Japan is second with $1.08 trillion and Ireland is third with $328.0 billion.
China has hinted that it will reduce its holdings if the U.S. doesn’t reduce its debt, which is now at $20.6 trillion. And it’s only going to get higher; Trump is cutting taxes and spending is up.
Under President Obama, the national debt doubled from roughly $10.0 trillion to nearly $20.0 trillion. Admittedly, much of that spending was in response to the Great Recession. But the question remains, what will happen to the national debt under President Trump? And what effect will that have on the value of the U.S. dollar and its status as the reserve currency?
In the meantime, the coming week is an important one for currency watchers. President Trump is delivering his first State of the Union address to Congress on Tuesday. On Wednesday, it is widely expected that the Federal Reserve will leave its key lending rate unchanged. And on Friday, the government releases its jobs data. After disappointing data from December, investors are looking to see if Trump’s massive tax plan had any effect on hiring.
“Major Foreign Holders of Treasury Securities,” U.S. Department of the Treasury, last accessed January 29, 2018.
“U.S. Debt Clock,” US Debt Clock, last accessed January 29, 2018.