Even the standard argument, according to which there is no alternative to the dollar, has lost its relevance.
Stephen Roach, a lecturer at Yale University and former chairman of the Asian division of one of the world’s largest financial conglomerates “Morgan Stanley”, told about it in a publication for Bloomberg agency.
According to him, all current arguments in defense of the dollar comes down to politics, but on the economic side everything is not so clear.
“My forecast that the decline in the value of the dollar by 35% may well occur in the near future, is justified from the position of comparison between the U.S. and currencies of a wide basket of trading partners of America”, – says the financier.
In this regard, he draws attention to the real effective exchange rate, which is calculated by the Bank for International Settlements. In cross-border trade flows, the first place is occupied by China, followed by the euro zone, Mexico, Canada and Japan.
“These five countries (the region in the case of the eurozone) account for 72% of total trade in the broad US dollar index”, – explains Roach. – “An additional 13% comes from countries in positions 6 to 10: South Korea, the UK, Taiwan, India and Switzerland. Volumes from the top 10 represent 85% of America’s cross-border trade.”
Thus, the weakening scenario of the dollar requires a combination of the strengthening yuan and the euro. The currencies of Mexico and Canada with which the US has a free trade agreement are also of great importance. These countries account for 25% of American processing industry trade.
Speaking about the situation with the Chinese yuan, the author notes China’s large-scale structural reform. Transition from production to services, from investment- and export-oriented growth to consumer-oriented growth, as well as liberalization of the financial system indicate that the yuan will be seriously strengthened in the future. Even Washington’s anti-China policy will not prevent this, the expert is sure.
Euro, despite the skepticism of experts, was able to survive the cataclysms faced by the EU in the past 10 years. Roach noted that the absence of a pan-European mechanism of fiscal transfers deprives the EU of the opportunity to resist the inevitable stress of asymmetric shocks, however, reports about the “rapid death” of the euro is greatly exaggerated.
“As China and the eurozone account for 40% of U.S. trade, I would be the first to agree that the math of the dollar crash will not work if the two currencies don’t grow as much as I expect”, – the financier continues. – “Moreover, with both countries suffering from a long-standing current account surplus, although it has fallen sharply in China in recent years, currency appreciation is a classic way to redress that imbalance.”
Moreover, strengthening other currencies will also have a negative impact on the dollar. This is especially true for the Japanese yen, the author is sure. He also evaluated the key counterargument to the predictions about the collapse of the American currency. We are talking about the reserve status of the dollar. He is forcing other states to use the dollar for international trade. However, according to the Bank for International Settlements, the dollar’s share in official currency reserves has fallen by 10% over 20 years – from 70% in 2000 to less than 60% now.
Roach is confident that this downward trend will accelerate in the coming years, given the destructive policy of the United States and its transition to a multipolar world.
If the dollar’s only hope lies in its “lack of alternatives,” this is rather a problem, concludes the author
“Yes, a weaker dollar will increase the competitiveness of the United States, but only for a short time. Despite the pride of American exclusivity, no leading country has ever devalued its path to sustainable prosperity”, – he stated.