The dollar has fallen 5% from its June high last week as markets watched the US Federal Reserve lower key interest rates.
Republican presidential candidate Donald Trump and his running mate, Sen. J.D. Vance of Ohio, have said they welcome a weaker dollar as a way to support domestic manufacturing.
With many voters thinking about inflation ahead of the November election, what does a weaker dollar mean for your wallet and investments? Is there anything you can do about it?
The dollar has been rising in value for most of the past decade, but that winning streak appears to be coming to an end. Let’s be clear: the dollar is not going anywhere and will probably remain the world’s dominant currency for a long time to come. Still, it’s realistic to think that after a long period of appreciation, the dollar is much more likely to fall in the coming years, and many investors are preparing their portfolios for that outcome.
US dollar: From your profit to the national interest
A stronger dollar increases returns on U.S. assets compared to investments abroad and lowers the cost of foreign goods and travel. For these reasons, a strong currency is often considered a good thing, and since at least the Clinton administration, the US Treasury Secretary has continued to argue that a strong dollar is in the national interest.
Now may be the time to prepare for a new US dollar regime.
The first reason is simple and obvious. That’s because the Federal Reserve cut its base interest rate by 0.5 percentage points on September 18, the first rate cut in four years.
The wave of dollar strength began when the Fed began tightening as interest rates turned negative in Europe and Japan. As a result, the United States has become a natural source of capital for large corporations and global investors. A Fed rate cut could reduce demand for this dollar, especially compared to currencies like the Japanese yen, where interest rates are currently rising.
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Downside risk to the dollar also reflects a variety of macroeconomic and geopolitical trends over time. For example, fiscal policies under both Republican and Democratic administrations often resulted in large deficits and increased public debt, even during periods when the economy was relatively strong.
A third of the funds borrowed come from foreign investors, and there may come a time when foreign investors are no longer interested in dollar-denominated bonds.
Impact of US politics and foreign policy on the dollar
Economic factors, such as interest rate levels, usually drive currency markets, but politics can also play a role.
Most scholars agree that the dollar’s dominant international role is supported, at least in part, by US military hegemony. Countries that benefit from U.S. security are more likely to use the dollar for trade and finance.
If the United States backs down from its foreign commitments, such as support for NATO and bilateral treaties with Japan and South Korea, foreign governments could begin to diversify away from the dollar.
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US foreign policy also prevents the dollar from being used internationally through aggressive financial sanctions. Since the 2003 U.S.-led war in Iraq, the American public’s interest in active military conflict has waned, and elected officials have turned instead to financial sanctions to achieve the country’s foreign policy goals. It became.
In February 2022, President Joe Biden imposed sanctions against Russia, saying the country was “at the beginning of a Russian invasion of Ukraine.”
While sanctions could reduce the cost in blood and treasure, they could also encourage other countries to find alternatives to dollar-centered banking and payment systems. Although moving to alternative payment networks can be costly, it may be worth it, especially for countries such as Russia and Iran, which are at risk of being almost permanently excluded from the global financial system. No.
Of course, there’s a reason foreign dollar holders aren’t so quick to turn away from U.S. capital markets. These include the profitability of major U.S. companies and the continued innovation of U.S.-based startups.
There is something about modern American capitalism that cannot be easily replicated around the world: its combination of tax and bankruptcy laws, its venture capital investments and ties to top universities, its extensive domestic energy production, and many other variables. It seems that there is.
Unless these factors change, dollar-based assets will likely remain competitive with overseas alternatives and the dollar’s depreciation will likely moderate.
Investors have several options to protect their portfolios from the risk of a weak dollar. This includes diversifying into non-U.S. stocks and bonds, and investing in gold (through physical bars and coins or exchange-traded funds).
Owning assets that benefit when the dollar falls also protects your personal finances from the subsequent rise in imported inflation.
Bitcoin may be the best investment option for those concerned about a weak dollar and persistently high inflation, according to a study by crypto asset management firm Grayscale. Bitcoin is an alternative currency system based on blockchain technology and a rare digital asset that is considered a digital alternative to physical gold.
According to a May national survey by Harris Poll, nearly one in five Americans currently owns Bitcoin, but about 50% of Americans don’t know much about Bitcoin or virtual currencies. is answering.
For Bitcoin believers, this shows that while the demand for new assets will continue, there is still significant room for growth in its adoption. We are optimistic that as more financial professionals learn about Bitcoin, they will understand its fundamental characteristics and Bitcoin will play an increasingly important role in their portfolios. .
Zach Pandle is head of research at Grayscale, a leading crypto asset manager.