Wither the coin of the realm

The mighty U.S. Dollar, the coin of the realm (where the “realm” is the entire world), appears shaky for the first time in a long time. Replacements like the Euro, Yen, or crypto are periodically offered up (forget the Chinese Yuan, as it is not even a freely-floating, deliverable currency). At the end of the day, just about anything vital and strategic that a nation needs trades in U.S. Dollars. The USD, as measured by The Federal Reserve Trade Weighted Nominal Broad Dollar Index, has swooned 7.2% since March 23rd of this year. During that same time, gold has hit new all-time highs and has increased 25%.

Surely, we have had U.S. Dollar weakness during the period of time between the financial crisis and now, but this time it just feels different. For the first time, at least a decent chunk of investors (foreign and domestic) are starting to feel that perhaps we don’t have our “stuff” together as well as Europe, Japan, and China. Many feel that our response to the COVID-19 virus has put us on our back foot in relation to the rest of the developed economies of the world. The U.S. leads the world in cases and deaths. Moreover, the plan to deal with the virus is fragmented by state, as opposed to a executing a national strategy. Our reopening of the economy and schools has been very disappointing and seems to be leading us back to the beginning more than to the end—or even the middle—of this disaster.

Additionally, there are our ballooning deficits and Treasury borrowings. We have become very comfortable in the feeling that, when all the dust settles, capital goes where it is most stable. Since Europe showed from 2008 onward that the fabric of the Union can fall to pieces in a crisis (or a Brexit!), there are only two flavors: Japanese Yen and U.S. Dollars. Since the financial crisis, the U.S. has had a better economic run than Japan, and the risk-free assets aren’t at negative yields (except for some slight blips in T-Bills). Since March 23rd, the Yen has appreciated 5% versus the USD. The Fed has already made it very plain that they are going to do whatever it takes to support the financial markets and the economy as best they can. They have and will continue to buy enormous amounts of the nation’s debt. However, we believe they would prefer not to buy it all! International demand is still necessary.


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