Although much of the news is consumed with pandemic updates, vaccine news, and politics, one of the biggest stories from the last year has been the stunning decline of the U.S. Dollar. This story looks to be a big deal in the coming year (or years) as well.
The U.S. Dollar, largely considered the world’s reserve currency and a haven to avoid risk, has plunged over 13% after hitting a nearly 3-year high on March 20th. The decline has been nothing short of staggering.
Although due to short-term headwinds we may be in a “risk-off” environment, it is truly hard to have faith in the U.S. Dollar to hedge against volatility. Despite its low level and weakness, the decline of the U.S. Dollar could continue.
The Fed’s monetary policy of keeping interest rates low for the foreseeable future in addition to government stimulus, the strengthening of emerging markets, and the allowance of inflation to heat up make it quite challenging to be remotely bullish on the dollar’s prospects over the next 1-3 years. Meanwhile, the U.S. has $27 trillion of debt and counting.
Any time the US Dollar rallies, it can be considered a mirage and “fools gold” because of all these short-, medium-, and long-term headwinds.
Just look at the below chart since December 1st, for example.
Since the dollar briefly pierced the 91-level on December 9th, it has fallen nearly 1.4%. Despite the dollar experiencing another mini-rally and nearly piercing the 91-level again on December 22, it has declined another 0.77% since the open on December 23rd. Back in December, there were rumblings of the dollar dropping back below 90 before the new year. 2021 is here now and the dollar is trading at 89.85, its lowest level since April 2018.
According to The Sevens Report, if the dollar falls below 89.13, this could potentially raise the prospect of a further 10.5% decline to the next support level of 79.78. This level has not been reached since April 2014.
There is also a new short-term headwind to consider with the U.S. Dollar- the upcoming run-off elections in Georgia for both Senate seats. If Democrats sweep, they will control both the House and the Senate. This will give them the ability to easily pass more progressive (and less market-friendly) policies, along with larger and more aggressive economic stimulus in the near term. While stimulus serves some purpose in aiding struggling Americans, this is also a very bearish catalyst for the dollar.
Meanwhile, as the dollar has underperformed, foreign currencies have strengthened, along with emerging markets, cryptocurrencies, and materials. Just look at how the U.S. Dollar has performed since its March high compared to the Market Vectors Gold Miners ETF (GDX), MSCI Emerging Market ETF (EEM), SPDR Gold Trust (GLD), and iShares Silver Trust (SLV).
As Emerging Markets surged, and precious metals hit all-time highs, the dollar plunged. If you hedged against volatility with Silver rather than the U.S. Dollar since March 20th, you’d have seen a return above 110% compared to a loss of 13%, for example.
Meanwhile, foreign currencies are strengthening as well. After China on Tuesday (Jan. 5) lifted its official yuan exchange rate by its highest margin since 2005, this was just another catalyst for the dollar to fall and other currencies to strengthen.
Bitcoin also continues its record run against the dollar. Although many people still do not believe in the benchmark cryptocurrency as a real store of value, its rally cannot be ignored, and institutional investors are starting to get on the bandwagon. Although JPMorgan CEO Jamie Dimon once called bitcoin a “fraud,” for example, JPMorgan now believes that bitcoin could rise to $146,000 long-term and compete with gold. The cryptocurrency, which gained over 300% in 2020, is now trading above $32,000. In the last two weeks since it exceeded the $20,000 level, it has also surged more than 50%.