How Will Bitcoin Behave During A Recession? (#GotBitcoin)
Economists find it increasingly likely that the US will soon experience a recession. Many Bitcoin speculators believe that the price of Bitcoin will rise in a recession, but that may be wishful thinking. Cryptocurrency behavior depends on what type of recession the economy is in. In a typical recession, Bitcoin would be sold down like any other risk asset, but it would thrive in a currency or a sovereign debt crisis. Bitcoin works as a hedge against calamity, not recession; it’s most likely to rise when there is inflation and declining trust in government. How Will Bitcoin Behave During A Recession
Choppy Waters Ahead
A recession is defined as a declining economy for two successive quarters, and we may be already be seeing signs of an early sell-off: the S&P 500 lost more than 10% this October. Nouriel Roubini, one of few economists to predict the housing crash of 2008, has recently emphasized the US’ increasing financial obligations in mortgages, student loans and credit card debt. These factors, he notes, are expected to intensify the next recession, which could be worse than 2008. Roubini is confident that we will see a financial crisis by 2020.
Other factors, such as the ten-year bull run in the US equities market and the fact that the Federal Reserve has raised interest rates three times this year, suggest that the US economy could soon experience a downturn. As Forbes wrote, two things are almost certain: (1) the US economy will sink into a recession and (2) no one knows when.
Is Bitcoin a Lifeboat?
Crypto enthusiasts like Anthony Pompliano have suggested “shorting bankers and longing Bitcoin” as an anti-recession hedge. Their reasoning is that, since Bitcoin is disconnected from the financial system and negatively correlated with equities markets, Bitcoin prices will rise if equities fall.
This year, Bitcoin has become increasingly correlated with the S&P 500 (see graph below). The S&P actually hasn’t been negatively correlated with Bitcoin since late 2016, and even then, the range of correlations fell between -0.1 and +0.2, indicating little to no correlation in either direction.
Bitcoin also seems to be less correlated with gold than it is with US equities: an interesting datum, considering that the “Bitcoin will rise in a recession” theory seems to be based on its similarity to gold. This, incidentally, is also poor reasoning: gold doesn’t flourish during a recession, so much as it suffers less than equities.
Although gold is a better refuge than the stock market during a liquidity crisis, neither choice is optimal.
What will Bitcoin Do In a recession?
The answer to this question depends on the type of recession as well as the conditions that caused it, as Dan McArdle of Messari pointed out. The two largest depressions in US history were deflationary, and a light-to-moderate recession is likely if history is telling.
There are two possibilities for a recession:
(1). Light to moderate recession (liquidity crisis)
(2.) Sovereign debt crisis / currency crisis
In the more likely probability of a liquidity crisis, Bitcoin investments will perform poorly, but they are likely to outperform the market in a currency crisis.
A light-to-moderate recession (liquidity crisis) would be characterized by calling debts due and a flight to cash to pay off those debts. It would be hard to get loans, and people would move out of their risk assets in return for dollars to pay their debts. This move to cash decreases the value of risk assets. Bitcoin would be sold for dollars, and its price would fall in accordance with every other light-to-moderate recession to date.
Fiat’s Difficulty is Bitcoin’s Opportunity
The “bull case” for Bitcoin is when a moderate recession starts to boil over into a sovereign debt crisis or currency crisis. If the general public starts to question whether or not central banks can maintain the nation’s currency – that is Bitcoin’s time to shine.
We can look for an example of this “bull case” by comparing Bitcoin to gold (which has yet to be proven as a store of value in a time of need).
The last US recession had an initial liquidity crisis and the price of gold followed the markets when people put their money into cash to pay off their debts – following the typical cycle of a light-to-moderate recession.
The eurozone debt crisis was the world’s biggest problem in 2011, but the crisis started in 2009 when the world first realized Greece could default on its debt. Poor European fiscal policies led to concerns about the Union’s ability to keep the euro afloat, sparking a capital flight to gold. Gold reached an all-time high. If we accept that Bitcoin will behave like gold as a store of value, then Bitcoin would probably perform very well in a combined recession-and-sovereign debt crisis. However, this event is much less likely than a smaller recession.
While most people think a tanking economy is good news for Bitcoin, that narrative is too simple. The most likely eventuality is that Bitcoin will perform similar to other risk assets.
That doesn’t mean that Bitcoin’s value proposition is broken; simply that it will perform differently in different types of recessions. In some recessionary scenarios, it will not be an effective hedge.
There are also scenarios where, unlike equities and cash, Bitcoin could perform well. However, a liquidity crisis in a recessionary period is not one of them, trader superstitions aside.
The idea that Bitcoin is a refuge from inflation has limited usefulness. Bitcoin has other positive attributes, including its ability to be a global digital cash that can be sent anywhere in the world within minutes. Most non-fiat productive assets are hedges against monetary inflation in the developed world; it’s time to stop propping up the myth that Bitcoin exists to save us from a recession.
What’s Your Take On This?
The Global Currency Wars Have Begun Because, Well, Inflation
Desperate to tame rising prices, central bankers are vying to boost domestic buying power at the expense of exporters.
The European Central Bank’s Isabel Schnabel started it. In February she flashed a chart showing how much the euro had weakened against the US dollar. Two months later, the Bank of Canada’s Tiff Macklem bemoaned the decline of the Canadian dollar. Swiss National Bank President Thomas Jordan suggested he’d like to see a stronger franc.
The US dollar had been soaring—now up 7% for the year—as the Federal Reserve prepared to aggressively combat inflation. And so one by one, central bankers elsewhere, just as desperate to tame the relentless march of inflation in their own backyards, began sending not-so-subtle signals that they would for once welcome a stronger currency—which helps reduce the cost of imports by boosting buying power abroad.
It’s a form of intervention so rare that their jawboning alone moved markets. On June 16, two of them upped the ante: Switzerland surprised traders with the first rate increase since 2007, sending the franc soaring to its highest level in seven years. Hours later, the Bank of England announced its own rate increase and signaled bigger hikes to come.
The value of currencies has emerged as an ever-larger part of the inflation equation. Goldman Sachs Group Inc. economist Michael Cahill says he can’t recall a time when the central banks of developed nations have ever targeted stronger currencies so aggressively.
The foreign exchange world is calling it the “reverse currency war”—because, for more than a decade, countries sought the opposite. A weaker currency meant domestic companies could sell goods abroad at more competitive prices, aiding economic growth. But with the cost of everything from fuel to food to appliances soaring, strengthening buying power has suddenly become more important.
It’s a dangerous game. If left unchecked, this international competition threatens to trigger wild swings in the value of the most dominant currencies, handicap manufacturers that rely on exports, upend the finances of multinational companies, and shift the burdens of inflation around the world.
Foreign exchange wars are notoriously a zero-sum game. There will be winners and losers. Every country “wants the same thing,” says Alan Ruskin, chief international strategist at Deutsche Bank AG, but “you can’t have that in the currency world.”
One of the most notable large-scale government interventions in currency markets came in 1985. The value of the US dollar had shot up during President Ronald Reagan’s first term on the back of rising long-term interest rates, reaching its highest-ever level against the British pound.
The administration initially saw this as a tribute to the strength of the US economy, but the drawbacks soon became clear. Reagan came under pressure from US manufacturers who were finding it increasingly difficult to market their goods abroad.
Lee Morgan, former chief executive officer at machinery giant Caterpillar Inc., estimated that hundreds of US companies were losing billions of dollars in international orders annually to Japanese competitors because of the stronger dollar.
In September 1985, US central bankers met with their French, German, Japanese, and British counterparts at the Plaza Hotel in New York City. In what became known as the Plaza Accord, they came up with a plan that would drive the US currency down 40% in the ensuing two years until finance ministers signed the Louvre Accord in Paris that ended the effort.
Since then, governments have rarely intervened so explicitly to influence the value of currencies. Subtler attempts are more commonplace.
In 2010, Brazilian Finance Minister Guido Mantega gave “currency wars” their name when he accused countries including Switzerland and Japan of deliberately weakening their currencies to increase their competitiveness abroad. The tensions deepened the rift between emerging-market economies and their more developed counterparts.
China has inflamed critics for years by refusing to allow the yuan to strengthen as cheap exports fueled an economic boom. Donald Trump targeted the country’s exchange rate on the campaign trail.
As the US and China traded blows with tit-for-tat tariffs during his presidency, China allowed the yuan to weaken below the symbolic level of 7 to the dollar—a line it hadn’t crossed in more than a decade—raising alarms that the currency might be “weaponized” and prompting the US Department of the Treasury to brand China a currency manipulator.
Perhaps no country today is better known for its efforts to keep a lid on the value of its currency than Japan, where the yen’s decline has padded the pockets of companies such as Toyota Motor Corp. and Nintendo Co. Bank of Japan Governor Haruhiko Kuroda has continued to signal a dovish stance—while conceding that the yen’s plunge is not good for the economy.
The currency has fallen more than 18% this year, and foreign exchange traders are increasingly betting on the day when central bankers there will have no choice but to reverse their stance.
In today’s currency war, the strong US dollar arguably has the most to lose. Its gains in 2022 have proven a blessing for a Federal Reserve that’s trying to fight the fastest price gains in four decades.
Treasury Secretary Janet Yellen has stressed the Biden administration’s commitment to a “market-determined” exchange rate, but that hasn’t stopped politicians from celebrating the dollar’s gain.
“The Fed has to do its job—it’s got to stay this course” in fighting inflation, Pennsylvania Senator Pat Toomey, a Republican, said on Bloomberg Television in May. But the strength of the dollar is “doing a lot to help,” he said.
The US may not enjoy this advantage for long. The Swiss and British rate increases have already weighed on the dollar, which earlier in June notched its biggest two-day drop since March 2020.
Some industries will welcome the weakening. Salesforce Inc. says it expects the dollar’s gain to cost it $600 million in revenue this fiscal year. “The dollar might have even had a stronger quarter than we did,” CEO Marc Benioff said during an earnings call in May.
Developing countries, especially exporters such as Argentina and Turkey, are among the most vulnerable, says Harvard economics professor Jeffrey Frankel. A lot of emerging economies have more debt denominated in dollars than they do in their own currencies, he says: “That’s the worst of all worlds—to have your currency depreciate against the dollar when you have dollar debt.”
Exactly how much a stronger currency will even tamp down inflation remains unclear. The so-called pass-through rate—the degree to which a foreign exchange rate affects consumer price index—has proven minimal, says Citigroup Inc. global chief economist Nathan Sheets, who previously worked for the Treasury Department and Federal Reserve. But in an era of rampant inflation, it may do more good.
A 10% gain in the dollar would’ve previously only damped inflation by about a half percentage point, Sheets says. Today, he says, it could be “a full percentage point.”
Experts warn that any government intervention carries a high risk of failure. “Targeting exchange rates can be a very fickle and unfruitful exercise,” says Mark Sobel, a former top Treasury Department official who’s now US chairman for the Official Monetary and Financial Institutions Forum, a think tank. “Predicting how exchange markets may react to a given policy choice can often be a fool’s errand,” he says.
On The Brink Of Recession: Can Bitcoin Survive Its First Global Economic Crisis?
Bitcoin has not seen a full-blown recession since it was launched as a response to the 2008 global financial crisis.
Bitcoin (BTC) was a response to the 2008 global recession. It introduced a new way to transact without depending on the trust of third parties, such as banks, particularly failing banks that were nevertheless bailed out by the government at the expense of the public.
“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” Satoshi Nakamoto wrote in 2009.
Bitcoin’s Genesis Block Sums Up The Intent With The Following Embedded Message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
But while Bitcoin keeps mining blocks unfazed, and its gold-like properties have attracted investors seeking “digital gold,” its current 75% comedown from $69,000 highs in November 2021 demonstrates that its not immune to global economic forces.
Simultaneously, the entire crypto market lost $2.25 trillion in the same period, hinting at large-scale demand destruction in the industry.
Bitcoin’s crash appeared during the period of rising inflation and the global central banks’ hawkish response to it. Notably, the Federal Reserve hiked its benchmark rates by 75 basis points (bps) on June 15 to curb inflation that reached 8.4% in May.
Furthermore, the crash left BTC trending even more in-sync with the tech-heavy Nasdaq Composite’s performance. The U.S. stock market index fell over 30% between November 2021 and June 2022.
More Rate Hikes Ahead
Fed Chairman Jerome Powell noted in his Congressional testimony that their rate hikes would continue to bring down inflation, albeit adding that “the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”
The statement followed Reuters’ poll of economists, which agreed that the Fed would raise benchmark rates by another 75 bps in July and will follow it up with a 0.5% increase in September.
That adds more downside potential to an already-declining crypto market, noted Informa Global Markets, a London-based financial intelligence firm, saying that it would not bottom out until the Fed subsides its “aggressive approach to monetary policy.”
But a U-turn on hawkish policies seems unlikely in the near term, given the central bank’s 2% inflation target. Interestingly, the gap between the Fed’s fund rates and the consumer price index (CPI) is now the largest on record.
Bitcoin Faces First Potential Recession
Nearly 70% of economists believe that the U.S. economy will slip into a recession next year due to a hawkish Fed, according to a survey of 49 respondents conducted by the Financial Times.
To recap, a country enters a recession when its economy faces a negative gross domestic product (GDP), coupled with rising unemployment levels, declining retail sales and a lower manufacturing output for an extended period of time.
Notably, about 38% expect the recession to begin in the first half of 2023, while 30% anticipate the same to happen during the Q3–Q4 session. Moreover, a separate survey conducted by Bloomberg in May shows a 30% possibility of recession next year.
Powell also noted in his June 22 press conference that recession is “certainly a possibility” due to “events of the last few months around the world,” i.e., the Ukraine-Russia war, which has caused a food and oil crisis around the globe.
The predictions risk putting Bitcoin before a full-blown economic crisis. And the fact it has not behaved anything like a safe-haven asset during the period of rising inflation increases the probability that it will keep declining alongside the Wall Street indexes, primarily tech stocks.
Meanwhile, the collapse of Terra (LUNA, since renamed LUNC), a $40-billion “algorithmic stablecoin” project, which led to insolvency issues in Three Arrow Capital, the largest crypto hedge fund, has also destroyed demand across the crypto sector.
For instance, Ether (ETH), the second-largest cryptocurrency after Bitcoin, dropped by more than 80% to $880 lows during the ongoing bear cycle.
Similarly, other top-ranking digital assets, including Cardano (ADA), Solana (SOL) and Avalanche (AVAX), plunged in the range of 85% to over 90% from their 2021 peaks.
“The crypto house is on fire, and everyone is just, you know, rushing to the exits because there’s just completely lost confidence in the space,” said Edward Moya, a senior markets analyst at OANDA, an online forex brokerage.
BTC Bear Markets Are Nothing New
Incoming bearish predictions for Bitcoin envision the price to break below its $20,000-support level, with Leigh Drogen, general partner and CIO at Starkiller Capital, a digital assets quantitative hedge fund, anticipating that the coin will reach $10,000, down 85% from its peak level.
However, there is little evidence for Bitcoin’s total demise, especially after the coin’s confrontation with six bear markets (based on its 20%-plus corrections) in the past, each leading to a rally above the previous record high.
Nick, an analyst at data resource Ecoinometrics, sees Bitcoin behaving like a stock market index, still in the “middle of an adoption curve.”
Bitcoin is likely to drop further in a higher interest rate environment — similar to how the U.S. benchmark S&P 500 has dipped multiple times in the last 100 years — only to recover strongly.
“Between 1929 and 2022, the S&P500 is up 200x. That’s something like a 6% annualized rate of return […]. Some of those asymmetric bets are obvious and pretty safe, like buying Bitcoin now.”
Most Altcoins Will Die
Unfortunately, the same cannot be said about all the coins in the crypto market. Many of these so-called alternative cryptocurrencies, or “altcoins,” have dropped to their deaths this year, with some low-cap coins, in particular, logging over 99% price declines.
Nevertheless, projects with healthy adoption rates and real users could come out on top in the wake of a potential global economic crisis.
The top candidate to date is Ethereum, the leading smart contract platform, which dominates the layer-one blockchain ecosystem with over $46 billion locked across its DeFi applications.
Other chains, including Binance Smart Chain (BSC), Solana, Cardano and Avalanche, could also attract users as alternatives, ensuring demand for their underlying tokens.
Meanwhile, older altcoins such as Dogecoin (DOGE) also have higher survival chances, particularly with speculation about possible Twitter integration in the pipeline.
Overall, a macro-led bear market will most likely hurt all digital assets across the board in the coming months.
But coins with lower market caps, dismissive liquidity and higher volatility will be at a higher risk of collapse, Alexander Tkachenko, founder and CEO at VNX, a digital gold dealer, told Cointelegraph. He added:
“If Bitcoin and other cryptocurrencies want to get back to their full power, they need to become self-sufficient alternatives to fiat currencies, especially the U.S. dollar.”
What’s A Reverse Currency War And Who’s Fighting One?
Currency wars flare up from time to time, usually during moments of economic tumult. They typically involve countries jockeying for a competitive export edge by driving down their currencies. What’s less common is a so-called reverse currency war.
But it’s possible that one could be brewing, whether as the result of deliberate policies or as a side effect of steps central banks are taking to fight inflation. In particular, the sharp rise in the value of the dollar as the US Federal Reserve pursues its most aggressive interest-rate hikes in almost 30 years is posing challenges to currencies and central banks around the world.
1. What’s A Currency War?
If a country’s currency falls in relation to other currencies, that can help its economy. Its exports become cheaper relative to competitors, boosting demand from abroad, while higher import prices spur domestic consumption of more homegrown products and services. And both of these provide support to local producers. A round of competitive devaluations is thought to have deepened the Great Depression that began in 1929, with countries leaving the then-prevalent gold standard to weaken their currencies.
In the early years of this century, the US and other rich countries complained that China was depressing the value of its currency, the yuan, to increase exports. But the phrase “currency war” was only popularized around 2010, when Brazil’s then-finance minister, Guido Mantega, accused wealthier nations of devaluing their currencies to stimulate economies still reeling from the financial crisis of two years before.
2. What’s A Reverse Currency War?
A situation in which countries work to make their currency stronger. Rather than boosting growth, the goal of any such move is to help tame inflation, since a stronger currency means that imports are relatively cheaper. The Fed’s actions have boosted the US dollar, driving up Bloomberg’s gauge of greenback strength by close to 7% this year.
On the flipside, the euro — which is used by more than 300 million people in Europe — has fallen to a five-year low against the greenback, while the British pound and a majority of other important currencies have slumped too.
3. Does A Stronger Currency Really Curb Inflation?
Currency strength does weigh on inflation but just how much is both debatable and subject to change, depending on circumstances. The degree to which exchange rate changes affect core inflation — which excludes volatile factors like food and energy — is called the pass-through rate. In some previous bouts of dollar strength, that rate’s been marginal. But some, such as Citigroup Inc. chief economist Nathan Sheets, argue that it could be higher during times of elevated inflation.
In 2020, when inflation was subdued, a 10% increase in the value of the dollar would have been expected to dampen increases in the consumer price index by only about half a percentage point. But at the current pace of inflation, which has been fueled in large part by higher commodity costs, the pass-through coefficients could be more than double that, approaching a full percentage point, said Sheets, who previously worked for the US Treasury and Federal Reserve.
4. What Are Central Banks Saying About This?
Most central banks seek to steer their economy through a combination of interest-rate changes and balance-sheet actions, and are usually wary of doing or saying anything that could be construed as trying to manage exchange rates directly. The US Treasury can (and has at various times) labeled some trading partners as currency manipulators if it believes they’re trying to gain an unfair advantage.
The Fed, for its part, emphasizes that its goal in raising interest rates is to fight inflation by curbing demand rather than bolstering the dollar. Fed Chair Jerome Powell has said that the central bank’s commitment to price stability has strengthened confidence in the dollar as a store of value. Yet while most of the Fed’s major global counterparts have historically tended to walk a similar tightrope around currency issues, some are becoming more vocal about the link between exchange rates and inflation.
5. What’s Different?
One sign of how things have changed recently is that some central banks previously known for using direct foreign-exchange intervention to weaken their currencies are now doing the opposite. The Swiss National Bank, which historically has acted in currency markets to weaken the franc, has allowed its currency to strengthen this year and said in June it would consider selling foreign currency if it weakened excessively.
“We let the Swiss franc appreciate,” SNB President Thomas Jordan said in March. “This is one of the reasons why in Switzerland inflation is lower than compared to the euro zone or the United States.” European Central Bank official Francois Villeroy de Galhau, meanwhile, has said that a euro which is “too weak” would go against that monetary authority’s price-stability objective, and in the UK, the Bank of England’s Catherine Mann went even further by highlighting how a faster pace of tightening could support the pound.
6. Are There Winners And Losers?
Consumers from the countries that successfully rally their currencies are the clear winners during a reverse currency war, with domestic prices tempered slightly due to greater buying power. But there are plenty of losers, including multinational corporations, nations that rely on exports and emerging economies. US companies ranging from Salesforce Inc. to Costco Wholesale Corp. have raised complaints about the surging dollar on recent earnings calls.
That’s because a stronger greenback lessens the value of those companies’ foreign revenue when translated back into dollars. It also makes their products less competitive as prices rise in local currency terms, reducing demand. For developing economies, there’s the risk that a “currency mismatch,” which takes place when governments, corporations or financial institutions have debt in US dollars but pay in a depreciating local currency, can push them into financial jeopardy.
7. Who Isn’t Joining The Party?
With a nose-diving currency, Japan appears to be playing by the currency war’s old rules. Bank of Japan Governor Haruhiko Kuroda has kept yields anchored to the floor in an effort to stimulate the economy. In the process, the yen has fallen precipitously, dropping more than 15% this year against the US dollar — the biggest drop of any Group-of-10 currency. In mid-June, ahead of the BOJ’s most recent policy meeting, Kuroda shifted his stance slightly, signaling that the central bank was watching the currency, in a rare departure from the status quo of staying mum on the country’s exchange rate.
He conceded that the yen’s abrupt slide wasn’t advantageous for the country’s economy, though the bank didn’t alter policy settings. And calls for currency intervention have swelled. Takehiko Nakao, the former head of foreign-exchange policy at the finance ministry, said “unilateral intervention shouldn’t be ruled out as a possibility” during an interview on Bloomberg TV on June 23.
Ballooning US Current-Account Deficit May Reverse The Dollar’s Strength
There’s a lot of hand-wringing in the foreign-exchange market about a fresh “currency war” breaking out, with countries and central banks taking action to support their weakening currencies to offset a strengthening US dollar. The last currency war took place a decade ago, but that one was about the opposite — finding ways to reverse the massive appreciation in local currencies because of a rapidly depreciating dollar. Regardless, the latest battle may end before it truly gets started.
To understand why, you have to go back even further — before the worldwide pandemic, before Europe’s debt crisis, before the global financial crisis — to the early 2000s, when global monetary policies were calibrated toward actual economic fundamentals rather than keeping economies from collapsing.
Back then, a primary driver of exchange rates was the US current-account deficit, and the dollar would routinely rise and fall based on whether the shortfall would contract or expand.
To be sure, this metric isn’t on par with unemployment or inflation when it comes to economic importance, but it’s critical for the currency market because by including investment flows on top of exports and imports, it’s the broadest measure of trade. And 20 years ago, the deficit was expanding rapidly, growing from around $50 billion near the end of the last century to more than $200 billion in 2005.
As a result, the US needed to attract billions of dollars a day to finance the shortfall. Naturally, this had a negative effect on the greenback, with the US Dollar Index plunging some 33% between July 2001 and late 2004.
The current-account deficit steadily improved from that point on, but then the pandemic hit and global trade was upended. The shortfall has ballooned from around $100 billion at the end of 2019 to $291.4 billion as of the end of the first quarter, the US Commerce Department said Thursday. At 4.8% of current dollar gross domestic product, the deficit is back on par with the period when the dollar was depreciating swiftly.
All this wouldn’t matter much if the US was attracting an increasing amount of foreign investment to finance the deficit, but that may no longer be happening. The Treasury Department said last week that foreign holdings of US Treasuries dropped by almost $300 billion in the first four months of the year.
Although the amount is a small fraction of the $23.3 trillion in marketable US government debt outstanding, and foreigners still hold some $7.4 trillion of that, it’s the direction that counts.
Then there’s the Federal Reserve’s holdings of Treasuries on behalf of foreign central banks and sovereign wealth funds. That account has shrunk from $3.13 trillion in early 2021 to a recent $2.99 trillion. Again, not a huge amount, but the direction is concerning.
Most worrisome of all, however, may be the dollar’s eroding status as the world’s primary reserve currency. Although the International Monetary Fund estimates the greenback makes up 58.8% of global foreign-exchange reserves, that’s down from a peak of 72.7% in 2001 and the lowest percentage since 1996.
Demand for haven-like assets amid the pandemic and higher relative interest rates have certainly underpinned the US currency, with the Dollar Index rising about 17% since the beginning of 2021. This has put tremendous pressure on other currencies.
For example, the Bloomberg Euro Index has dropped 10%; the Bloomberg British Pound Index is down more than 7% since May 2021; Japan’s yen has plunged 20%; the MSCI EM Currency Index is off 4.61% since late February alone.
True, a weaker currency brings some benefits. For one, it makes a country’s exports more affordable. But that hardly matters when world trade volumes are still incredibly depressed because of supply chain disruptions. Plus, officials are generally more concerned with the speed of currency moves, which can disrupt an economy because companies have little time to adjust.
As my Bloomberg News colleagues Amelia Pollard and Saleha Mohsin noted, the European Central Bank’s Isabel Schnabel highlighted a chart in February showing how much the euro had weakened against the dollar. Bank of Canada official Tiff MacKlem then bemoaned the decline of that country’s dollar. Swiss National Bank President Thomas Jordan then suggested he’d like to see a stronger franc.
In the case of the US, a weakening currency could give foreign investors even less incentive to buy dollar-denominated assets, making it harder to finance the record budget and trade deficits. That could mean higher borrowing costs for the government, companies and consumers. It’s been two decades since the US current-account deficit drove global currency markets, but that may be about to change and in a big way.