The collapse of the dollar is not as far off as is believed, but it could happen in the short term and “at the speed of light”: according to Stephen Roach, economist and professor at Yale, a sharp collapse of the US dollar could come “much sooner than expected”.
The distinguished economist, interviewed by Marketwatch, says that a devaluation of the dollar is very likely, which would end the hegemony of the greenback as a reserve currency. An event of this magnitude would spread across global financial markets: “In the Covid era, everything moves at warp speed” Roach continued, citing the popular Star Trek series as a metaphor for the rapid changes that the economic system has undergone.
Dollar forecast 2021: up to 35% less for the greenback
Speaking of the speed of changes in the economic-financial field, Stephen Roach gives the example of the United States: the unemployment rate has risen to 14% in a few weeks due to the coronavirus crisis (over 30 million unemployed), even if at the beginning of 2020 it was at an all-time low for the last 50 years. Just as the Fed’s fiscal and monetary response reduced the federal budget from $ 7.2 to $ 4 trillion in just a few months.
With the same speed, the dollar could suddenly depreciate. The 2021 dollar forecast indicates a downward trend for various reasons, but Roach has estimated that by 2021 the dollar could lose up to 35% of its value. During the recession due to the pandemic, the contradiction between the lack of savings and the growing current account deficit of the US intensifies, the analyst points out.
The era of the dollar’s global privilege as an international store of value may have come to an end: the dollar, like any exchange value, is a relative price that reflects a nation’s economic, financial, social and political situation with respect to comparable characteristics of other nations. Precisely this point must be emphasized with regard to the United States, deeply shaken and torn in 202 not only by the pandemic and the economic crisis: if 2021 does not heal the social and political wounds, not just the economic ones, there will be great changes.
Roach believes this is not the time to be complacent. The national saving rate – says the economist – will probably drop more than it has already done. It currently stands at 1.4% of national income – the lowest level since 2011 and one fifth of the 7% average from 1960 to 2005 – the United States.
It should be noted that the U.S. Dollar Index is currently trading at around 91.84 (November 30, 2020): in June, when Roach predicted the currency would plummet by 35%, the DXY was at 96. At that time, Roach said he expected it to collapse in the coming two years: now, the economist believes the dollar crash could occur by the end of 2021.
“At a time when savings are absent and the economy is aiming to grow, we are in the presence of these current account deficits with which savings are borrowed: a situation that is increasingly affecting currencies. And the dollar is not immune to these adjustments”.
Roach is also worried about the health conditions of the US economy, in a situation in which the number of deaths in the States due to the coronavirus pandemic has exceeded 200,000 and Europe is witnessing a resurgence of infections.
A tumble of the dollar would certainly not do the forex world any good: currencies such as the yen and the euro would soar, with the result of sowing not a little discontent in the economies of Japan and the Eurozone, which both depend on exports. Of course, so far it cannot be said that Christine Lagarde, number one of the ECB, has done much to curb the appreciation of the euro: Goldman Sachs expects EUR / USD to reach 1.30 in the next 6 months.