The U.S. dollar started 2023 with its worst return in more than half a century. This unprecedented decline has raised alarm from economists and investors alike. The dollar is down more than 10% against a basket of currencies from America’s 6 largest trading partners. This steep decline has critical ramifications for the U.S. and worldwide economy.
The U.S. dollar’s traditional role as a safe haven asset rests on the strength and stability of the U.S. economy. Recent developments have called into question its future as the planet’s top “safe haven” currency. Here’s why they should stop blaming the dollar’s plunge. They point to growing inflation concerns, changing trade patterns due to the last administration’s trade war, and a ballooning national debt.
Factors Behind the Decline
The depreciation of the U.S. dollar today can be attributed to combinations of short- and long-term economic pressures. Inflation fears are pushing everyone—individuals to institutional investors—out of the dollar. Or they are afraid that a depreciation of the notes will decrease their already very limited purchasing power. President Donald Trump’s unpredictably disruptive, increasingly punitive trade policies don’t help. His vocal criticism of the Federal Reserve is creating huge uncertainty about an already highly unpredictable U.S. economy.
Paolo Pasquariello, a finance professor at the University of Michigan, spoke out on the unfortunate circumstance. He noted that the decline is a direct result of “the recent erratic policy making by U.S. authorities.” This kind of instability has made the dollar a less attractive option, leading holders of assets to look elsewhere to park their investments.
Moreover, if Congress uses their spending bills to add to a rapidly growing national debt, they will only increase inflationary pressures even more. New bonds are being issued just to pay for the old ones. At the same time, fears of an ominous inflationary threat are growing, forcing investors to reassess their views on U.S. assets.
Implications for Consumers and Travelers
A depreciated currency often results in higher prices for imported goods, which can lead to increased costs for everyday items. Richard Michelfelder, an economist, explained how this phenomenon works:
“If you’re buying light fixtures from a firm in India and they’re taking dollars, and they get fewer rupees for those dollars, they’re going to start to charge more dollars.”
U.S. travelers overseas will encounter higher expenses as the dollar’s value declines in relation to other currencies. Michelfelder elaborated on this issue:
“If it takes more dollars to buy a euro and you’re going to Europe, everything you buy will cost more.”
These hikes would make a big dent in most household budgets, reducing discretionary spending and damaging economic activity at an uncertain but likely meaningful scale.
The Future of the Dollar
Looking forward, several key variables can shape how the future of the U.S. dollar will play out. As inflation rises and consumer prices increase, central banks holding significant amounts of U.S. Treasuries may begin to shift their assets to alternatives like gold or other currencies.
One unnamed economist expressed concern about the potential devaluation of dollars held in reserves:
“If I’m a central bank holding half a trillion dollars of U.S. Treasuries, essentially the value of that would decline with more inflation if I don’t take action now.”
International investors have even more reason to change their tune. If true, this could further accelerate declining demand for the dollar, exacerbating its current challenges.
