Is Mexican currency valuable in the US?
That's why the dollar is stronger than it has been in a long time
The American currency is currently in demand. If you look at trade-weighted indicators, it is even at a record level. It probably takes various powerful impulses to change something about it.
"The dollar is our currency, but your problem." The saying with which the US Treasury Secretary John Connally warned Europeans about a devaluation some fifty years ago has now been reversed. In fact, the dollar is stronger than it has been in a long time.
Trade-weighted at a record level
Measured against the trade-weighted dollar index as calculated by the US Federal Reserve, it is practically at a record level. In terms of the euro, with exchange rates below $ 1.10, it is more “valuable” than it has been for two years. The Argentine peso, the Brazilian real, the Mexican peso, the New Zealand dollar, the Turkish lira and most of the world's other currencies have come under considerable pressure in some cases over the past four weeks. If, on the other hand, it is measured against the Swiss franc, it has lost around 77% of its value since the 1970s, and it has hardly recovered from it in the recent past. So the appreciation of a currency can be so different in practice on the foreign exchange market.
The dollar index is at a record level
That opens the door to relatively arbitrary arguments. US President Donald Trump, for example, believes the dollar is overvalued due to his gut feeling and has repeatedly scolded its own central bank (Fed) in recent weeks. He blames them for it. The criticism was so clear that market participants even vaguely counted on intervention at the expense of the dollar. It hasn't got that far so far, but at least the Fed has now buckled and lowered the key interest rate instead of tightening monetary policy further as originally planned.
However, this change in strategy has so far achieved little. In fact, the dollar is comparatively attractive for investors because the American interest and yield level is still higher than in Japan, Europe or Switzerland, for example. There the states are in some cases even paid for taking on liabilities. In the latter regions, government bond yields are negative across all maturities. In addition, the American economy is still doing relatively bravely in an international comparison, while the consequences of the trade conflict are having a negative impact on European export companies - which could force the European Central Bank to take increasingly extreme "monetary policy easing exercises". The difference in yields between the USA and Europe should therefore tend to continue. Even the high corporate debt and the significantly increasing national debt do not seem to deter investors from investing in the US so far.
Add to this the fact that the dollar acts as the world currency. Many emerging countries and other states conduct their foreign trade - for example with energy and raw materials - in the American currency or take on dollar liabilities. On the other hand, large American investors like to invest their money in rapidly growing regions because they expect higher returns there than on the American financial markets. Both phenomena complement each other perfectly and even fuel each other as long as international trade is flourishing and the global economy is growing robustly. As soon as this is no longer the case, however, it becomes difficult - as the past few months have shown. In fact, Trump's trade disputes are putting the brakes on the increasingly insecure world economy at the very moment when the monetary and fiscal stimulus measures of the past few years are losing their effectiveness and normalization at the level artificially created with a lot of debt is becoming more and more probable.
Vulnerable "dollar system"
Such phases show how fragile the dollar-centric financial system is. Economic and financial crises such as in Turkey or Argentina then make it clear where the risks that have been simply ignored for a long time have been hidden. If the appetite for risk among international investors is then reduced and they withdraw, the whole thing becomes accentuated. Suddenly they want to be better compensated for the risks, and the dollar is rising because big American investors are repatriating their funds and because international investors are taking refuge in the apparent safety of the greenback. Due to American financial practices, it is certainly not, but it is more solid than many other currencies. After all, he is also supported by the strongest military power in the world. Then there is China, which has significantly weakened the yuan in response to American behavior.
Seen in this way, the dollar is likely to become stronger rather than weaker, at least in relation to the currencies of economically weak countries, until American growth expectations also deteriorate more significantly. Only when decisive monetary and fiscal policy measures become apparent will a trend reversal become more likely. Only then would internationally coordinated interventions have a chance of success. There is only one problem: Trump would like to have a weaker dollar, but he obviously doesn't like the coordination that much.
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