The ongoing repercussions of the COVID-19 pandemic have rattled the global economy, especially in the United States, where the federal government and the Federal Reserve have adopted aggressive monetary policies to shore up the economyThis includes an unprecedented influx of dollars into the system, leading many to question the long-term stability of the dollar as the world’s dominant reserve currency.

Numerous financial experts and institutions have raised red flags, predicting significant depreciation of the dollar in the coming yearsNotable figures in this discourse include former Morgan Stanley Asia Chairman, Stephen Roach, who insightfully pointed out that the excessive issuance of currency by the U.S. could ultimately erode the dollar's unique privilegesHis prediction indicates a potential devaluation of approximately 35% over the next two to three yearsThis sentiment is echoed by conservative entities like Nomura Securities from Japan, which forecast a 20% decline in the dollar’s value over the next five years due to rising U.S. debt and economic inflation.

Even Goldman Sachs, a bastion of American finance, has projected a 5.3% weakening of the dollar within the next yearThis stark reality is illustrated by the dollar index, which tracks the dollar's performance against a basket of major currenciesSince March 25, following the Federal Reserve’s aggressive monetary measures, this index has dropped by about 9%, signifying that the dollar has already lost substantial value within a mere three-month periodThis decline correlates with surging gold prices, which also indicate a shrinking confidence in the dollar.

Understanding the core reasons behind this impending depreciation involves delving into two primary factorsThe first is the sheer volume of currency flooding the marketIn response to the economic fallout from the pandemic, the U.S. has unleashed a staggering $3.71 trillion in new base moneyCoupled with financial leverage from commercial banks, this amounts to an estimated influx of over $10 trillion into the economy—an amount that rivals the total U.S. dollar reserves held by countries worldwide, estimated at around $11 trillion.

Despite this colossal increase in dollar supply, there hasn’t been a corresponding rise in demand for goods, services, or investments

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In fact, demand has diminished, as the purchasing power of the dollar declines with the influx of excess currency into the marketSimply put, the dynamics of supply and demand are skewed, leading to a natural depreciation of the dollar in comparison to other currencies, such as the euro, renminbi, and yen, which have not faced the same level of overproduction.

The second critical element contributing to the anticipated dollar depreciation is the projection that the U.S. net savings rate is set to plunge into negative territoryHistorically, savings serve as the foundation for a nation's capital, essential for fostering economic developmentPrior to the pandemic, the savings rate was already alarmingly low at just 1.4%. The financial strain ushered by COVID-19 has resulted in plummeting incomes for households and businesses alike, subsequently depleting savings reserves, while federal deficits balloon to unprecedented levelsIt is now a foregone conclusion that the net savings rate will turn negative, with estimates suggesting it could drop to between -5% and -10% in the next few years—startling figures when compared to the already significant decline seen during the 2008 financial crisis.

With net savings in the red, U.S. investments will increasingly rely on foreign capitalThe quickest method to attract this capital amidst a pandemic is by accelerating the depreciation of the dollarThis tactic allows foreign currencies—such as the euro, renminbi, and yen—to gain more purchasing power, encouraging foreign investors to acquire shares in U.S. high-tech and advanced manufacturing companiesHowever, this approach presents its risksFor one, U.S. willingness to accommodate significant foreign share purchases is uncertainMoreover, countries that typically view the dollar merely as a transactional currency might become anxious as their dollar-based reserves lose value, threatening their trust in the dollar’s supremacy.

Nonetheless, while it appears the dollar is on a trajectory towards significant devaluation, the likelihood of it losing its status as the world’s dominant currency or collapsing entirely in the short term is minimal

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