One of the effects of the economic recession caused by the covid-19 pandemic is that the world was flooded with dollars. The United States Federal Reserve (FED) – whose mission is to control the country’s monetary policy as all central banks do – drastically reduced the interest rate to almost 0%. And since the interest rate is equal to the cost of a country’s money, the lower it is, the less its currency is worth.
In parallel, the FED gave free rein to the printing of banknotes to buy bonds both in the private sector and in the public sector, with the aim of mitigating the effects of the crisis. This injection of money made it possible to finance the increase in fiscal spending and gave oxygen to the markets. But at the same time, it helped push the dollar’s value down against the world’s major currencies in the last 10 months.
This can be seen in one of the indexes that follow the evolution of the currency, the Bloomberg Dollar Index which reached a maximum of almost 1,300 points on March 23. And from then on a fall began that has not rested until now as the graph shows Thais is a fall of more than 12% in the last 10 months a percentage that may vary slightly depending on the index used to monitor the evolution of the currency. It is currently at its lowest level since the beginning of 2018 and many experts agree that the currency will continue to depreciate.
The Dollar Will Continue To Fall
The collapse of the dollar has just begun, Stephen Roach, professor at Yale University and former president of the investment bank Morgan Stanley in Asia, tells BBC Mundo. The academic predicts that the currency could fall more than 35% by the end of this year based on three big reasons. The first is that there is a sharp increase in the US current account deficit, that is the country pays more abroad for the exchange of goods, services, and transfers than it receives.
His projection is that this deficit will continue to drive a decline in the currency. The second reason is the rise of the euro after the governments of Germany and France agreed on a fiscal stimulus package in addition to the issuance of bonds.And the third is that Roach predicts that the Federal Reserve would do little to prevent the dollar from falling.With the United States increasingly dependent on foreign capital to make up for its growing domestic savings deficit, he explains, and with the policies adopted by the Fed that create a massive excess of banknotes the case for a strong weakening of the dollar seems more compelling. than ever he argues
In relation to the effects that a depreciated dollar has on emerging markets (such as Brazil, Mexico, Argentina, Colombia, Peru, or Chile in Latin America, the expert suggests that increases may come in some of the stock markets in those countries. As long as the Federal Reserve does not raise interest rates, which is what Roach assumes will happen the weakness of the dollar should cause increases in foreign equity markets in general and in emerging market stocks in particular Explain.
Do Not Overdo It
However, other economists argue that while the currency will be a bit weak this year, in no case should a crash be expected. The fall of the dollar should not be exaggerated,” Mark Sobel, president for the US of the Official Forum of Monetary and Financial Institutions (OMFIF), wrote in early January on the study center’s website. His position is that there is a very depressing outlook for the dollar in the environment . The dollar may fall this year, but too negative a narrative is not justified says, Sobel.
One of their arguments is that the dollar has already fallen quite a bit (13% in 2020 from its peak in March). Another is that in the midst of global uncertainty it is not so certain that investors prefer to take risks and bet on currencies other than the dollar. In parallel, the economist also believes that there may be relatively more favorable monetary conditions in the US and that the current cycle of a strong dollar is simply coming to an end.
Effects In Latin America
In the region, the decline in the dollar came with a lag compared to other parts of the world. One of the reasons that explain this delay in their decline against the currencies of the Latin American economies is that they are riskier than Diego Mora, a senior executive of the consultancy.
So, although the currency is falling, the region is still in demand for its quality of refuge when there is uncertainty.The depreciation of the dollar in Latin America only began four or five months ago, says Mora in dialogue with When analyzing the largest economies in the region the analyst says that Mexico is the country where the dollar has depreciated the most followed by Chile Colombia, and Brazil. The consequences of the collapse vary substantially depending on the different economic actors. On the one hand, Latin American consumers benefit
The consensus among analysts is that despite the differences between countries the depreciation of the dollar brings more benefits than disadvantages for the region. A depreciating dollar is definitely positive for Latin American economies, says Joseph Mouawad a fund manager at Carmignac which specializes in emerging markets. A weak dollar comes with higher prices of raw materials he tells regarding the debt in dollars of Latin American countries, Diego Mora explains that as there is a greater amount of the currency in the world and interest rates are low the United States has less negotiating power. Thus, the dollar debt of Latin American countries can be renegotiated at lower interest rates.