The US dollar is going to resume its secular decline. Its role as the world’s dominant reserve currency will come under renewed threat over the next decade as export-surplus economies look to diversify their dollar reserves into other currencies.
This will not happen suddenly and there might be upward corrections for the dollar, particularly if markets are disappointed with the failure to achieve a V-shaped global economic recovery and there is a rush back to safe-haven assets.
But the US is undermining its safe-haven status and debasing its currency by trying to sustain a credit-fuelled economy through huge fiscal deficits and the monetization of public debt. That will drive up government bond yields and reduce the willingness of China and other foreign dollar holders to hold US dollar assets.
Over the past decade or so, the global trading system has funnelled more than 80% of all export revenues into dollars, like a torrent emptying into a finite sea. The holding of dollars by exporters, savers and foreign central bankers was voluntary. It was based on the belief that the US economy was stable, despite its now obvious disequilibria of excess consumption, lack of savings, a credit bubble and external deficits.