Dollar Bets

Not for the first time, a sharp depreciation of the US dollar has prompted predictions of its demise as the world’s pre-eminent store of value and means of payment. With America currently beset by a still-rampant pandemic, a worsening economic outlook, and incompetent leadership, might the dollar bears finally be right?

In this Big Picture, Yale University’s Stephen S. Roach thinks the dollar’s recent drop marks the start of a long-overdue decline, while the European Union’s approval in July of a €750 billion ($893 billion) recovery fund will likely hasten the euro’s rise. And the prospect of a stronger euro elicits a cautionary note from Daniel Gros of the Centre for European Policy Studies, who warns that it could further damage the eurozone’s relatively open, export-dependent economy.

But Harvard University’s Jeffrey Frankel says that although current record-high gold prices partly reflect investors’ growing desire for a safe-haven alternative to the dollar, the greenback still has no obvious rival as the leading international reserve currency. For that reason, notes Barry Eichengreen of the University of California, Berkeley, the dollar’s recent fall against the euro does not portend its terminal decline. 

Similarly, New York University’s Nouriel Roubini says the dollar’s depreciation is to be expected in the current macroeconomic context, while potential threats to its hegemony remain slower-moving and farther off. Instead, argues Allianz’s Mohamed A. El-Erian, today’s dollar weakness is part of a larger, gradual fragmentation of the international economic order – just when rising global challenges demand greater policy coordination.