What Does the Future Hold for the US Dollar?
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.
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.
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.
P.S.: What will happen with the US dollar in near future? Share your opinion in comments.