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The US dollar keeps falling and its forecast is bleak

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The US net domestic saving rate has suffered the biggest drop in history, making the economy even more dependent on foreign money, according to the US economist Stephen Roach.

The currency fell by 10% to 12% compared to America’s major trading partners and at its weakest levels since early 2018.

“There is more to come,” warns Roach.

The economist predicted in June last year that the dollar would fall by 35% by the end of 2021. The forecast was based on three factors: the current account deficit, euro growth and Fed stocks.

And now, Roach “is even more convinced of the dollar’s weakness than he was six months ago.”

Current account deficit

As expected, the current account deficit deteriorated further, widening to 3.4% of gross domestic product in the third quarter. “At its current level the deficit is at its worst since the end of 2008,” says the analyst.

The deterioration, according to Roach, is driven by “explosive increases in the federal budget deficit related to COVID.”

The net domestic saving rate — depreciation-adjusted savings for businesses, individuals, and the public sector — fell below zero in the second and third quarters for the first time in a decade.

Roach estimates that the combined COVID relief packages total $ 5 trillion or 24% of 2020 GDP. 

“Although not a stimulus in the conventional sense, this fiscal injection beats all modern records by a wide margin. The domestic savings rate, as a result, should sink further below zero, putting the already large deficit by the current account under even more intense downward pressure,” he analyzes.

The Euro

The euro has moved little in the first half of the year, rising by around 7% from February to May, notes the author: “This is because the monetary union had a critical flaw: a single currency and central bank but without a unified fiscal policy.”

However, in July, German Chancellor Angela Merkel and French President Emmanuel Macron reached an agreement on an aid package that included pan-regional fiscal support of € 750 billion – $ 908 billion – and was authorized the issuance of sovereign bonds.

“This adds the fiscal piece that was missing from the monetary union, quite possibly providing a ‘Hamiltonian moment’ for the world’s most undervalued major currency,” he explains.

The Federal Reserve

When current account deficits are under pressure, the central bank can usually be counted on to come to the rescue by tightening monetary policy. “And this is not the case with the Federal Reserve today,” says Roach. 

The author notes that the Fed “would do little in response to any weakness” in the US currency.

“With the U.S. increasingly reliant on foreign capital to compensate for its growing shortfall of domestic saving and with the Fed’s open-ended quantitative easing measures creating a massive overhang of excess liquidity, the case for a sharp further weakening of the dollar looks more compelling than ever,” he adds.

According to the economist, a pandemic and an economy on the brink of a double recession leave the Biden Administration no choice but to opt for another round of massive tax relief. 

“This result would have consequences for any economy. For the United States, which does not want to save, it means a weaker dollar,” concludes the author.

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