The US Dollar Index has lost 10% from its March highs and many press comments have started to speculate about the likely collapse of the US Dollar as world reserve currency due to this weakness.
These wild speculations need to be debunked.
The US Dollar year-to-date (August 2020) has strengthened relative to 96 out of 146 currencies in the Bloomberg universe. In fact, the U.S. Fed Trade-Weighted Broad Dollar Index has strengthened by 2.3% in the same period, according to data compiled by Bloomberg.
Misguided lockdowns have destroyed the global economy and the impact is likely to last for years. The fallacy of the “lives or the economy” argument is evident now that we see that countries like Taiwan, South Korea, Austria, Sweden or Holland have been able to preserve the business fabric and the economy while doing a much better job managing the pandemic than countries with severe lockdowns.
The ECB balance sheet has risen to 53.9% of GDP in July 2020. This compares to a 32% of the Federal Reserve and 33% of the Bank of England. This means a 1.78 trillion euro increase year-to-date. Furthermore, excess liquidity has soared to 2.9 trillion euro, a 1.2 trillion increase since January.
Added to this unprecedented monetary stimulus, the Eurozone has included a record-high 10% of GDP in various fiscal stimulus programmes. None of it has prevented the economy from showing signs of slowing down in August.
The United States added 1.76 million Jobs in July 2020, compared to a consensus estimate of 1.48 million. Unemployment fell to 10.2% vs 10.6% expected. It is true that the rate of job creation is slowing down and labor force participation rate remains at 61.4%, but we need to compare the figures with the rest of the world, where we are witnessing a worrying “jobless recovery”.