Scorn has long been heaped on those daring to question the supremacy of the U.S. dollar as the world’s dominant reserve currency. I certainly received more than my fair share in reaction to a column I recently wrote for Bloomberg Opinion on the likelihood of a sharp decline in the greenback. The counter-arguments were strong and highly political, basically boiling down to the so-called TINA defense – that when it comes to the dollar, “there is no alternative.”
That argument is very important in one critical sense: The dollar, like any foreign-exchange rate, is a relative price. As such, it encapsulates a broad constellation of a nation’s value proposition — economic, financial, social, and political — as viewed against comparable characterizations of other nations.
It follows that shifts in foreign-exchange rates capture changes in these relative comparisons — the U.S. versus Europe, the U.S. versus Japan, the U.S. versus China, and so on.
The DOLLAR is meant to be a source of safety. Lately, however, it has been a cause of fear. Since its peak in mid-January the greenback has fallen by over 9% against a basket of major currencies.
Two-fifths of that fall has happened since April 1st, even as the yield on ten-year Treasuries has crept up by 0.2 percentage points.
That mix of rising yields and a falling currency is a warning sign: if investors are fleeing even though returns are up, it must be because they think America has become more risky. Rumours are rife that big foreign asset managers are dumping greenbacks.