By Nouriel Roubini
T he recent sharp depreciation of the U.S. dollar has led to concerns that it may lose its role as the main global reserve currency. After all, in addition to the U.S. Federal Reserve’s aggressive monetary easing – which threatens to debase the world’s key fiat currency even further – gold prices and inflation expectations have also been rising. But, to paraphrase Mark Twain, reports of the dollar’s early demise are greatly exaggerated. The greenback’s recent weakness is driven by shorter-term cyclical factors. In the long run, the situation is more complicated: the dollar has both strengths and weaknesses that may or may not undermine its global position over time. Chief among the short-term negative factors is the Fed’s ultra-loose monetary policy. With the United States monetizing ever-larger budget deficits, the Fed’s approach looks more accommodative than that of most other major central banks. The dollar tends to weaken during risk-on episodes, and vice versa. That is why its value peaked during the February-March panic over COVID-19, and then weakened from April onward as market sentiment recovered. Moreover, the Fed’s activation of currency swap lines with other central banks eased the dollar illiquidity that had been pushing the exchange rate higher earlier in the crisis. Now, a flood of global dollars is putting downward pressure on the greenback.
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