What's happening to the dollar? In the first two months of this year it was more or less stable at around 1,04 dollars per euro. Since the beginning of March it has started a sharp downward slope (meaning that the amount of dollars needed to buy one euro is increasing): the dollar/euro exchange rate on Friday, May 23, it had reached 1,13, with a loss of value of the dollar in terms of the euro of approximately 8%. The dollar had actually touched, against the euro, peaks of devaluation by nearly 10% in the second half of April, but was still very depressed at the end of last week. I have chosen the euro as a comparison only for simplicity, but similar trends are found in the exchange rates of the dollar against all other major currencies.
What Affects the Exchange Rate? The Forces Behind the Value of the Dollar
Il exchange rate of one currency against another is simply the price charged in the market to exchange those two currencies for each other. It depends on a myriad of factors, which is why it is virtually impossible to predict in the short term. It may arise from commercial transactions that have one of the two currencies as a means of settlement, both for tangible manufactured goods and, increasingly in the modern world economy, for intangible services. It may arise from an investor's desire to sell or buy financial assets (liquid funds, bonds, stocks) denominated in one of the two currencies, with funds denominated in the other of the two. It may arise above all from each trader's or investor's expectation that that price will change in a certain direction in the future and from his consequent decision to move immediately to profit from that supposed price change: the decision is taken even if there is no immediately underlying commercial or financial transition, therefore for reasons purely speculative.
But in the long term, that is, over a few months or years, the exchange rates of a currency end up reflecting the real condition of the economy in its relations with the rest of the world. This is the question we are asking today: is the downward movement of the dollar in the past three months the sign of a lasting change, present or expected, in the conditions of the American economy or is it an accidental oscillation? Among the many indicators available to try to answer this question I take one that I consider particularly significant: the yield on American government bonds with a duration of thirty years, the so-called 30-Year Treasuries.
Why Treasury Yields Are Rising and the Dollar Is Crashing
From the end of February to last Friday it rose by more than 10%. When the yield of a fixed income bond rises it means that its market value falls proportionally, because if I want to sell a bond that yields less than what can be obtained at that moment on the market I have to settle for a value lower than the one at which I bought it. And vice versa: between yield and value it is impossible to say which is the chicken and which is the egg. The fact is that in the last three months there has been a tendency throughout the world to to dispose of long-term US federal government bonds and this has determined a loss of value, hence an overheating of performance. Simultaneously, and perhaps consequently, the dollar has depreciated on the foreign exchange markets.
This dual phenomenon is peculiar. US long-term bonds have always been the “paradise sure” for savers around the world, those who desire security much more than immediate profit. A security that comes from the fact that the United States has been considered the hegemonic country since the end of the Second World War: the far greater nuclear power, the most efficient and dynamic economy whose currency stands out in the reserves of all central banks, the most stable democracy, even the center of creation and diffusion of the dominant popular culture (film, television, music, comics). The great American umbrella has covered everyone, has made everyone prosper, it is natural that those who have a fortune to protect invest at least a part of it in government bonds of that country with the longest possible duration, and therefore ask for dollars in exchange for their own currency.
Dollar in crisis and confidence in decline: the Trump effect
Since the new president of the United States of America took office, Donald Trump, at the beginning of this year, the spell seems to have been tarnished. Around the world, the doubt may be creeping in that the United States can no longer, also because it does not want to, play the role of protective power, including economic and financial, that it has exercised up to now. Is it all Trump's fault? Not entirely, but a lot of it, yes. Not entirely, because the loss of luster of American power began at least twenty years ago, with the eruption and affirmation on the world geo-economic scene of other large countries, first and foremost China. A lot, yes, because the Trump administration has blown up the problem, sharply accelerating in three months trends that would otherwise have continued for thirty years. It has dealt tremendous blows to the international system of economic and political cooperation, to the internal legal and political order, even to that pillar of American greatness that for over a century have been its universities. Above all, it has sown uncertainty e confusion, showing the world how the all-powerful America has fallen prey to a handful of unlikely characters of little competence and dubious morality, who utter contradictory cries and counterproductive proclamations.
In this climate, it is no wonder that the dollar is slipping. It will continue to do so until the political and institutional system of that great country finds a way to restore its government to coherence and credibility.
