US dollar under pressure: credit reduction, credit explosion and falling trust

The US dollar loses shine. Trade conflicts, a towering national debt and crumbling trust in the economic leadership of the United States ensure a gradual but significant decrease in the value of the dollar.

Where the US dollar was the undisputed international reserve currency for decades, a shift now seems to be going on. This is apparent from a report from Reuters.

From overvaluation to correction

After years of being overvalued, the dollar now seems to be going into a correction phase. The index that measures the power of the dollar, the DXY, fell by more than 10 percent compared to the peak in January. This is one of the sharpest decreases in months. Currency rate George Vessey from Convera states that there is “still enough room for further weakening”.

At the beginning of this year, the dollar even traded up to 22 percent above its 20-year average. A relapse of another 10 percent would reduce the currency to levels from Donald Trump’s first term of office.

The recent credit reduction of the United States by Moody’s further deteriorated sentiment. Investors are increasingly doubting the dollar as a safe haven, partly due to the increasing American budget deficit. Analysts warn that Trumps tax plans can increase the deficit by $ 3 to $ 5 trillion, on top of an existing national debt of more than $ 36 trillion.

According to George Saravelos van Deutsche Bank, the lack of budget discipline causes increasing nervousness on the markets. Although the White House emphasizes that Trump is wearing a “strong-dollar policy”, more and more investors think differently about it.

Outflow threatens from Asia

The threat is not only from the inside. Asian countries such as China, South Korea and Taiwan jointly have around $ 2.5 trillion on dollar reserves. Analysts warn that even a slight rehearsal of these positions can have major consequences for the dollar. The recent rapid increase in value of the Taiwanese currency illustrates the fragile position of the dollar on the currency markets. A small outflow of Taiwanese USD reserves had major effects.

But also the conscious attempts of the BRICS countries to be less dependent on the dollar playing along. Since last year, Brics countries have been using more and more local currency in settling bilateral trade.

Trust is shaking

The American consumer remains remarkably resilient in the midst of all this headwind, which may temporarily delay a further weakening. But according to analyst Jack McINTYRE of Brandywine Global, the trend is clear: “It is now mainly about opportunities to sell the dollar in the event of strength.”

The combination of domestic tax uncertainty and foreign reduction of dollar positions marks a possible tipping point. The image of the US dollar as the ultimate safe haven is under pressure, and with that image also the fundamental value of the American currency.