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What Does the Future Hold for the US Dollar?

By Alexander
In Forex News Trading
May 23rd, 2012
8 Comments
2741 Views

The United States dollar is one of the world’s leading currencies in the world. Some though believe that the viability of the dollar is being threatened by various obstacles, economic, social, political, and otherwise. Some economists even predict that it could become completely obsolete in the not-so-distant future. What has made some of the world’s most trusted experts come to this conclusion about a currency that, in the past, has been a symbol of stability and steadfast dependability? What does this mean for the American economy and for the rest of the world?

Is the US Dollar “strong” enough?

First, we need to understand what it means to say that a currency is strong. When a particular currency is strong, it essentially means that people trust it and are willing to leave their assets in the form of that currency. If the United States dollar is strong, it means that people believe it will more or less maintain its value relative to the other currencies around the globe.

future of the US Dollar

People are willing to hold dollars for long periods of time, because they are not afraid of them losing their value. Usually, this is measured quantitatively by looking at exchange rates with other countries. If it costs a lot of Euros (or a lot of any other currency) to buy one dollar, it can be said that the dollar is strong.

But how are exchange rates determined? The Forex market works like any other market; that is, prices (or in the case of money – exchange rates) are based on where supply and demand meet. Since the “supply” of most currencies is determined by the central banks who print the money, the dominant factor is demand for the currency.

When there are many investors who want to do business in one currency, they exchange their own currency for the desired one. This drives demand upward, and the price, or exchange rate, for the desirable currency increases. In this way, the strength of a currency is intimately tied to the strength of the economy.

Is it worth to leave your assets in USD?

When talking about the US dollar, the biggest cause for concern is that foreign investors are becoming less and less willing to leave their assets in the form of dollars. Sometimes, there are entire countries, as is the case with China that leaves portions of their assets in dollars.

When it appears that the United States economy is not doing well (the United States entered a severe recession in 2008, the consequences of which are still being felt), investors know that the currency is unstable and look forward to exchanging their dollars for other currencies. Thus, the demand for the dollar is in danger of taking a plunge when no investors want to deal in it.

Making matters far worse is the fact that the United States government is at an unprecedented level of national debt. If the United States comes to the point that it will no longer be able to pay back its debts to other countries, it will be the domino that sets the destruction of the dollar in motion.

US national debt infographics may 2012

The dollar’s value in the foreign exchange market will tank, and the buying power of the dollar will be virtually zero. Some economists fear that the dollar has already started down this path, and that to fund its debts the United States Federal Reserve is simply printing more money. The problem with that – it can be a short-term remedy. It increases the supply of dollars in the foreign exchange market, driving the exchange rate of the dollar down further, leading to a downward spiral that leads to nowhere except deeper debt.

In this case, even if the US actually could pay back its debts, it wouldn’t matter. As long as investors don’t see the dollar as valuable, the game is over because the dollar has lost its value. Soaring gold prices are evidence that even many average people are sceptical about the dollar’s value and want to hold their assets in another form.

The future of the US dollar will depend on how responsible the government is in attempting to get out of debt and on whether or not the US economy will continue to grow and thrive. If not, many Americans and anyone who still holds his assets in dollars will be in a world of trouble.

Article is written with help of information from exchangecurrency.com.

P.S.: What will happen with the US dollar in near future? Share your opinion in comments.

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8 Responses to “What Does the Future Hold for the US Dollar?”

  1. Alexander, I agree with your views and concerns regarding the US Dollar as a perceived save haven going forward. However, I am highly suspect about how “responsible” the US government will be in trying to get their country out of this mess. At the same time, you also have the Euro currency getting pummeled due to a myriad of problems in the Eurozone. So many are left wondering, “In what stable currency do we park our money?”

    It’s a great question and one that we have debated for years before coming to one conclusion. Instead of trying to pinpoint what currency will appreciate the most against others in the long-run and then trying to position most of your assets in it, a safer bet might be to pick at least 3 major currencies (including possibly AUD and CHF) and diving the asset equally amongst them. That way, you’d be able to limit the effect of a decrease in buying power (when compared to leaving everything in just one currency, like the Dollar, that might be subject to a severe evaluation).

    • Alexander says:

      Thanks for your comment. It will be great if you use your name instead of keyword.
      According to article: What about Chinese Yuan as a “safe harbor” for your capital?

  2. Vineeth says:

    I think this is the one of the most lucid explanations of the US national debt and its division, I have come across in a while. Brilliant article and great work!

    • Alexander says:

      Thanks a lot. How do you like the infographics?

    • Bob says:

      A currency is only as strong as the faith there is in it based on the ability of the governing administration to properly employ it’s available resources. The US presently is run by a wealthy corporate oligarchy so there is no accountable administration and no way for the administration to employ the countries resources for the benefit of it’s people. If this doesn’t change the economy will collapse.

      • ADRIAN PEREZ says:

        BOB I TOTALLY AGREE WITH YOU THAT THIS COUNTRY IS BEING ADMINISTERED BY THIS SHADOW GOVERNMENT, WEALTHY FAMILIES SUCH AS THE ROTHCHILDS WHO OWN THE CENTRAL BANKS OF THE U.S AND ABROAD, AND THE ROCKEFELLERS TO NAME OF FEW WHO ARE PRIMARLY FOR ON THERE OWN COVET MEANS AND NOT FOR THE WELFARE OF THE PEOPLE… PEOPLE STILL HAVE FAITH IN A RESPONSIBLE ADMINISTRATION, ITS UP TO OUR GOVERNMENT TO DO THE RIGHT THING AND EMPLOY RESPONSIBILITY TO STRENGTHEN OUR DOLLAR AND GET THINGS BACK ON TRACK…

  3. Christian says:

    Liked the article, a good and clear view of a possible future.

    A question i’d like to see someone try to answer, is how much more monetary emission can the global market take before assets withdrawing from dollar cause an outright inflation, and what could a crisis of the euro mean if the dollar should go into inflation simultaneusly. Wouldn’t the fall of one cause assets to flee to the other ?
    .

    • Alexander says:

      Hello Christian, in my opinion, the crash of one of the strongest currencies may cause assets to flee to the commodities such as gold, etc.

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