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What is the position of the world after the collapse of the dollar and what will happen if the dollar collapses globally?

What is the position of the world after the collapse of the dollar and what will happen if the dollar collapses globally?

     What would happen to the world if the dollar fell from its position?  Do Americans have the right to feel happy about the devaluation of their currency, and who are the countries benefiting and affected by the falling dollar?

     Very important questions raised in the global monetary and financial corridors, in light of uncertainty with the continuing Corona pandemic and the trade war between China and America.

     The response came in the form of unconventional answers from the American economist of Egyptian origins, Muhammad Al-Erian, the chief economic advisor at Allianz, who served as president of the Global Development Council to President Barack Obama and a former deputy director at the International Monetary Fund, in an article published in the British newspaper The Guardian.

     Two stories about the dollar’s ​​decline

     Al-Erian says: “The decline of about 10% in the value of the US dollar since its peak in March has given rise to two stories.

     The first takes a short-term perspective, focusing on how depreciation can benefit the US economy and markets;  The second takes a long view, and worries about the fragile position of the dollar as the world's reserve currency.

     Both accounts contain some truth, but they are not sufficient to justify the emerging consensus around them, according to Al-Arian.

     Several factors have combined to exert downward pressure on the dollar (as measured by the DXY Trade-Weighted Currency Index in recent weeks), causing the currency to depreciate, reversing nearly half of the rally in the past ten years in a matter of months.

     The US dollar faces a huge challenge / Reuters

     And because the US Federal Reserve eased monetary policy (both real and future) in response to a deteriorating economic outlook, the accumulated income of dollar-denominated safe havens, such as US government bonds, decreased.

     As investments in the United States lost some of their appeal, there was a shift in favor of emerging markets and Europe (the European Union agreed last month to pursue deeper financial integration).

     There are also indications of declining capital flows to the US.  Home buying by foreigners appears to have declined again, in part due to the US government's adoption of inward-looking policies and the use of the weapon of trade and sanctions measures.

     Who is the beneficiary of the dollar’s ​​decline, and who is affected?

     With the exception of Lebanon, Turkey, and a few other countries that have witnessed a sharp decline in exchange rates compared to the United States, most currencies appreciated against the dollar.  But reactions to this generalized phenomenon among those with elevated currencies were not uniform.

     Some countries, particularly in the developing world, welcomed the dollar’s ​​decline, as the previous weakening of their currency was contributing to higher import prices, including food prices.

     Moreover, the weak dollar provides them with more room to support local economic activities through more stimulating fiscal and monetary measures.

     But the reaction has been less welcome in other advanced economies.  Japan and the eurozone member states, in particular, fear that a currency appreciation may threaten their economic recovery from the Covid-19 shock as well.

     The Bank of Japan and the European Central Bank should now worry that they are not only reaching the limits of their policy effectiveness, but that they could also put their economies at greater risk of collateral damage and unintended consequences.

     But the dollar's decline is welcome in America

     Meanwhile, in the US, the depreciation of the dollar was welcomed as a very positive development for the economy, at least in the short term.

     After all, economic textbooks tell us that a weak dollar enhances the international and domestic competitiveness of US producers, compared to foreign competitors, makes the country more attractive to foreign investors and tourism (in terms of price), and increases the dollar value of overseas-earned revenues for US companies.

     All this is also good for the US equity and corporate bond markets, which benefit most from the greater appeal of dollar-denominated securities, when they are quoted in a foreign currency.

     The long-term view is less positive in its view of the impact of the dollar's decline on the United States.

     The concern is that the depreciation of the dollar will further erode the currency's global standing, which has already been weakened by US policies in the past three years, from protectionism and armed sanctions to overcoming global standards and the rule of law.

     The more the dollar’s ​​credibility is eroded, the greater the risk that the US will lose the "exorbitant privilege" that comes with the issuance of the world's main reserve currency.

     For decades, the United States had the advantage of being the country of the dollar, the world's reserve currency.

     This situation allowed her to exchange bits of printed paper or digital inputs with goods and services produced by other countries (giving others dollars that they printed in exchange for very expensive goods).

     It takes advantage of others' desire to outsource the management of their financial fortunes to its own enterprises.

     There is consensus that the dollar will continue to decline

     Both accounts point to a further significant decline in the dollar's value.  While the immediate effects are positive in theory, the practical situation is likely to be different in the long run.

     Because much of the US economic activity is currently weakening due to government restrictions, and the reluctance of individuals and companies to return to previous consumption and production patterns.

     About half of the US states have now reversed or stopped the process of economic reopening.

     Moreover, the positive effects of today's market require further rehabilitation after the health crisis.  Due to increased liquidity, particularly by central banks, most assessments have already been decoupled from economic and corporate fundamentals.

     Under these financial conditions, it is hard to imagine that the depreciation of the dollar will have more than a marginal effect on real economic performance.

     What would happen to the world if the dollar fell from its position?  And why will there be no alternative?

     As for the dollar’s ​​role as a reserve currency, and what replaces it, Al-Arian says that I remember a simple principle I learned in university: It is difficult to replace something with nothing, at this time there is simply no other currency that can or will fill the dollar’s ​​place.

     Instead, we will continue to see small tubes being built around the dollar, and because none of these will be large enough to replace it, the end result will be a more fragmented international monetary system.

     The dollar’s ​​weakness today is not a blessing for the markets and the US economy, nor a harbinger of a drop in the global currency, but it is part of a more gradual fragmentation of the international economic system.  The main factor in this process is the appalling lack of international policy coordination, at a time of mounting global challenges.

     Source: Arab Post
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