Coronavirus has struck a powerful blow for the global economy.
Statements by us Federal reserve about upcoming difficult times for the US economy last week is not a joke alarmed the global financial community. That was confirmed by the collapses of stock markets around the world, and has weakened the dollar against the Euro: at the moment quotations reached $around 1.1400/€, although after and retreated to $1,1240/€, reports the Chronicle.info with reference to Country.
But economists of the United States began to predict the collapse of the world’s largest economy: the size of the US GDP in 2019 was $20, and 49 trillion of the $85.8 per trillion of the entire world. A lot of fuss about an article by the famous American economist Stephen roach for publication by Bloomberg under the title “the Coming collapse of the dollar”.
He predicted in 2020, the rapid growth of the size of the Federal budget of the United States (up 17.9% of GDP), an increase in the current account deficit, the reduction of the population’s income and savings. And, of course, the decline of the dollar: according to the calculations roach — to the level of 2011. It’s $1,39/€, annual average. Due to the issue and other factors.
The economist believes that the devaluation of the U.S. currency will weaken its position in the world, and she is actively going to lose its influence in the world.
We decided to find out how justified unflattering forecasts for the dollar, and that exchange rate world rally means for Ukraine.
1. Why talking about a possible collapse of the dollar?
Stephen roach highlighted some of the reasons that can result in the collapse of the dollar.
First, it is the rapid growth of the size of the Federal deficit of the United States. To cover him as always through borrowings. That is, simply printing dollar.
Second, the increase in the current account deficit of the United States. The country will do even less capital, and to emerge from it more.
Thirdly, it will continue to shrink income and personal savings of the population, will have a negative impact on his welfare and consumer sentiment. People will spend less, which means incomes of producers of goods and services will be reduced. That is affected people, business, and budget (you will get less taxes from people and corporations).
Fourthly, if all above-mentioned problems will be solved by the emission of the dollar, the US will start actively growing inflation, which has not yet risen above 2%. At the same time aktiviziruyutsya the devaluation of the dollar.
All this, according to roach, it is sufficient that the average annual dollar exchange rate fell to the level of 2011. It’s $1,39/€. And that because of this decreased the influence of the dollar in the world and he began to shed the other countries.
2. Why the markets believe the worsening problems of the U.S. dollar?
The official authorities do not deny the serious problems in the American economy. The U.S. Federal reserve’s two-day meeting the us Federal reserve last week made three important statements:
— maintained the size of their bets on the old level of 0-0,25% per annum,
— predicted recession, i.e. the decline in GDP by 6.5% (after rising 2% prior to that), and a rise in unemployment from 3.5% to 9.3%,
stated about the readiness of the longer and more actively continue to hold the troubled assets, that is, the emission of the dollar.
“While investors did not expect that the Federal reserve will again cut rates, but hoped that she would make encouraging statements to the market. Instead, the fed’s Jerome Powell said that America has a long way to restoration of economy”, — explained the reaction of the markets the chief of Department on work with investors of Bank “Credit Dnepr” Andrey Prikhodko.
Statement of the American authorities about a deep and protracted recession for many became shock. Because showered tragic predictions for the us dollar and the US economy as a whole. Against this background, collapsed the stock markets and the exchange rate of the dollar briefly fell to a minimum value in 2020 to $around 1.1400/€ (a few hours has been rolled back to $1,1240/€).
De facto, the financiers have confirmed that they believe in panicky predictions about the collapse of America’s GDP and devaluation of the dollar. Some do not rule out more negative scenarios.
American analysts are talking about the probability of the larger issue of the dollar under the troubled asset. Initially to the end of 2019 portfolio of troubled securities and loans the U.S. Federal reserve estimated somewhere in the $4 trillion, and was expected to increase to $6 trillion (the issue was waiting in the under $2 trillion). And last week, began to appear more dire predictions: someone talked about “print” to $4 trillion, and someone — generally $7 trillion.
The figures given in the eye, without calculations and justifications, but still frightened the markets. Even though economists knew that the extent of the impact of coronavirus on the US economy is still unclear, and much will depend on the scale of the epidemic.
“High uncertainty of future developments can not talk about any specific volume of purchase. However, the complicated nature of the pandemic coronavirus, its strong negative impact on the economy and numerous risks may again require the activation of the fed over an extended period of time”, — said the head of the Department of corporate analysis ICU Oleksandr Martynenko.
3. What arguments do supporters of the version about the collapse of the dollar?
The main fear of those who believe in the collapse of the dollar is us dollar issue and its consequences. They fear the rapid growth of inflation and the depreciation of the dollar.
This is possible if you enable the “printing press” to the fullest and deploy uncontrolled emissions.
Moreover, this process may overlap the decrease in the share of the dollar in international reserves of many countries and the decrease in the share of U.S. currency in global payments.
For example, the Central Bank of Russia in 2018 has reduced the share of the dollar in its reserves from 45.8% from to 22.7%, and increased its reserves of euros (21.7% to 31.7 per cent) and Chinese yuan from 2.8% to 14.2%.
And the state Administration of exchange control of the PRC has announced the reduction of the dollar in foreign exchange reserves in China from 79% to 58%.
If you play both risk and excessive emissions will hit a dollar, you have to take immediate action. For example, analysts of the Danish Saxo Bank before the proliferation of the epidemic of the coronavirus predicted in 2020, devaluation of the dollar by 20%, and the creation of a new security (reserve) currency.
They believe that it can launch the Asian infrastructure investment Bank with the support of China and Russia. Even conventional out — Asian Drawing Right (ADR) or a ruble/yuan, and even calculated its rate — 1 ADR = $2.
This is only theory, but they confirmed that certain developments on a rainy day after all.
“Such a step can be aimed at eliminating the U.S. dollar in regional trade. The local economy will be able to conclude contracts in the new currency,” said Saxo Bank chief economist Steen Jakobsen.
Moreover, it is not the only possible scenario in case the dollar to lose its status as the reserve currency.
“Global currency market is already witnessing the phenomenon of bitcoin as the main cryptocurrency. It is impossible to exclude any scenario in which will appear the cryptocurrency, which in future will become something universal for provisioning and maintenance of instant cross-border payments”, — says head of the analytical Department at Eavex Capital Dmytro Churin.
4. What are the arguments of those who believe that the dollar nothing bad will happen?
However, while the possible collapse of the dollar and the failure of peace from him as from a key reserve and settlement currency, a few experts believe. The majority still believes that the fed will point to “print more dollars” and the dollar will not fall much. They have several arguments about this.
First, this is not the first issue of the dollar lately. The fed launched the “printing press” after the mortgage crisis of 2008. As you know it turned into a world collapse and turned into a recession next year. US GDP in 2009 fell by 3.1%, in General, developed countries — by 3.4%, and global — 0.1%.
This decline resulted in the devaluation of the dollar, but it was not catastrophic and irreversible: in 2008, the average dollar exchange rate amounted to $1,47/€, the lowest rate for twenty years. However, long remain at this level.
Already in 2011 the U.S. currency strengthened to $1,39/€ in 2012, its average annual rate was at the level of $1.28/€. But the strong she has become in 2015-2016, when held on $1,11/€.
All thanks to the active binding of the Fed (monetary instruments) “printed” in the midst of a crisis of the dollar. The issue as now took place under the troubled asset somewhere in the current rate, and it was called quantitative easing — QE.
Depending on the period, came out somewhere in the $75-105 billion per month.
Second, the fed is not the only Central Bank in the world, which started a printing press. On the issue of national currencies to support their economies are now almost all Central banks of the world. For example, the European Central Bank recently announced an increase in emergency volume of asset repurchase program (PEPP) to €600 billion to €1.35 trillion.
That is, everything is now printing money. And hence the issue in the U.S. against this background may not lead to a strong subsidence of the dollar relative to other currencies.
Thirdly, it is considered that the issue of the dollar quite a bit will increase inflation in USA, and it will even have a positive effect. This is what’ve been asking for American producers. They do not like preservation in the United States straps on the inflation level to 2%. It is believed that the increase to 5-6% will help to support the business. So he will give little chance to raise their profitability.
5. For some indicators it will be possible to judge whether the coming collapse of the dollar or not?
Experts advise to pay attention to several factors which will determine the “health” of the us currency.
1. The duration of quarantine measures in the United States. Now they are gradually fold, although experts do not rule out a second wave of coronavirus. If it still will not lead to a new stop of the American economy, it is likely that the dollar will stand. If quarantine measures to resume, the hold positions of the American currency will not be easy.
2. The political situation in the United States. If in spite of the difficult pre-election period and mass protests, the U.S. government will be able to keep the situation in the country under control, it will be a plus for the dollar. If America enters a period of prolonged political instability and the split in the elites, it could strike at the credibility of its currency.
3. The fed plans to repurchase the assets (dollar issue). If growth is more than two times already pose significant risks to the stability of the currency.
4. The main factor is the speed of substitution of the dollar by other countries as reserve and settlement currency. If this process will be accelerated, and that means the dollar will face very high risks.
6. What does it mean for Ukraine
The depreciation of the dollar directly impact on Ukraine.
Because most of the savings is in that currency. And national Bank, the share of dollar assets in foreign exchange reserves at the beginning of 2020 was 76.7%. This is mainly US securities, which the NBU can quickly turn into a living dollar. For other currencies, had much less than the Euro by 10.6%, Chinese June — by 3.1%, the British pound and 2.3%.
On the other hand, a large part of our external debt is also in dollars.
If the U.S. currency collapses, it will suffer population, and the state can how to lose (by the depreciation of their assets), so much to buy (in the reduction of external debt).
In a particular advantage of the devaluation of the dollar and will our exports. The lower the dollar, the higher commodity prices, which are nominated (which is a large part of the agricultural and steel products are the backbone of our exports).
On the other hand, if the dollar will fall very much (below $ 1.5 per Euro), it will accelerate the transition of international payments in other currencies (or at all in some fundamentally new system). But this process is clearly not one day.
In any case, in order not to lose in exchange rate fluctuations is still a major world currency, you need to carefully follow the news from the US and from financial markets. For those indicators that described above. And adequately respond to them.