News from the financial markets

Five reasons why the dollar will weaken

Felix Brill, Chief Investment Officer
Reading time: 2 Min
The US dollar will depreciate over the long term. It is overvalued on the basis of the purchasing power parity theory and the inflation rate in the USA also speaks against it. The dollar will become a weakling.

The US dollar is, and will remain for the time being, the number one currency in the world. Nobody disputes this role. But that says nothing about valuation. There are at least five reasons for a devaluation of the dollar.

First, the dollar is too expensive against other currencies. To be sure, the Greenback gained in value during the Corona crisis and thus extended the appreciation phase that has lasted since the euro crisis. If we take the purchasing power parity as a valuation yardstick, the probability of a depreciation of the Dollar now outweighs the probability of an appreciation. This assessment refers to a time horizon of two to three years.

Secondly, the US has a higher inflation rate than Europe and Japan. Structurally, the dollar is therefore depreciating against these currencies over time. Thirdly, the US has got a twin deficit, i.e. a simultaneous deficit in the current account and in the federal budget. The mere existence of a twin deficit need not be a major burden on the currency per se. It usually only becomes difficult when one or both components deteriorate significantly. And that is the case now, in times of crisis. The new borrowing of the government prepares the ground for a phase of dollar weakness.

You will find the full article with all the arguments, as well as many more stories on the US dollar, in the current issue of the investment magazine Telescope.

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