The dollar, which rapidly increased in value at the beginning of the pandemic, failed to sustain this performance and has lost 5% against the euro in recent weeks. The future of the dollar, which has seen the lowest point in the last two years in the dollar currency index, is shaky according to most market analysts.
With the effect of the coronavirus pandemic, people invested in precious metals such as gold and silver and assets such as Bitcoin, which they regard as more reliable than foreign currency, hit the dollar first. Then, the support packages prepared by the American government to relieve the people who were overwhelmed by Covid-19 and the Fed’s fixing interest rates with other central banks caused the dollar to depreciate against both the yen and the euro. The decline of the Fed index for the reserve currency by 7% was another signal for investors to lose their confidence in the dollar. Loomberg stated in the Dollar Currency Index review that the dollar saw the lowest level in 2 years. After that, hedge funds began to take a position that the dollar would depreciate. Experts do not think that these developments show a bright outlook for the future of the dollar.
Are Scenarios 1985 and 2002 Repeated?
The dollar, which had its first big break between 1980 and 1985, managed to double its value. In the continuation of this rapid rise, the dollar started to depreciate rapidly after the Plaza Accord signed between France, West Germany, Japan, England and the USA on September 22, 1985. This rapid decline has resulted in a hit-and-miss effect for both the American market and the public. The scenario in 2002 ended with a serious depreciation of the dollar due to some shocking policies of then president George W. Bush. This time, the Fed’s interest policies and coronavirus may be the main roles of the decline.
Jack Mclntyre of Brandywine Global Investment Management thinks the scenario from 1985 and 2002 could be replicated. Believing that the reserve currency has gained more value than it should have in recent years, McIntyre; He says the dollar could depreciate over the next few years. McIntyre, referring to the Fed’s ever-growing balance sheet, the ever-increasing debt amount and what happened in the coronavirus process; He suggests that what will happen in the next few years may be reminiscent of the years 1985 and 2002.
Experts who think that the dollar will depreciate after the sudden policy changes in 1985 and 2002, say that the reserve currency’s bottom of two years is actually a predictable move. We are at the beginning of the end for the dollar, according to most market analysts. Given such a landscape, unlike the United States, a positive development may be in question for Europe, with the euro appreciating against the dollar.
The Other Side of the Coin: The End Of The Ascension Rally Is Not The End Of The Dollar
Names like McIntyre think history will repeat itself and the dollar will lose power again, but not everyone agrees. For example, according to experts like Liz Young of BNY Mellon Investment Management, the end of the bull rally does not mean that the dollar is coming to an end.
The dollar still covers 60% of the world’s reserves and is the most used unit in international transactions. Liz Young emphasizes that there is a difference between the full collapse of the dollar and its decline, while arguing that the current drop is a pullback. At the same time, Young says he does not think the dollar will lose this reserve-dominating stance in the near future.