The dollar bears are roaring. Ray Dalio, founder of hedge fund giant Bridgewater Associates L.P., has repeatedly warned that the dollar is at risk of losing its reserve currency status. In March he wrote a post for LinkedIn titled “Why in the World Would You Own Dollar Debt?” Stephen Roach, the former chairman of Morgan Stanley Asia, wrote a piece for Bloomberg Opinion in January headlined, “The Dollar’s Crash Is Only Just Beginning.”
It’s true the dollar has been soft lately. The Bloomberg Dollar Spot Index, which measures the U.S. currency against a basket of 10 other major currencies, is down 14% since March 2020.
But March 2020—when pandemic fears caused a stampede into U.S. assets—is an unrealistic benchmark. The index’s decline since the start of 2020, before the pandemic struck, is less than 6%. And a broader index gives a different picture. The Federal Reserve’s broad dollar index, adjusted for inflation, which covers 26 currencies and is calculated monthly, looks like this:
As you can see, the dollar remains in the top half of its trading range going back to 2006, when the index calculation begins. No sign of a crash here.
Of course, the dollar bears could argue, and do, that there’s trouble ahead for the U.S. currency because the U.S. is overspending and undersaving. The argument is that if the U.S. can’t finance all the investment it needs to do through savings generated at home, then it will either have to underinvest, which will result in long-term economic weakness, or import savings from abroad, which will put downward pressure on the currency.
It’s not a crazy argument, but the situation isn’t nearly as dire as it’s portrayed. The current account is the broadest measure of the U.S. balance in trade in goods and services as well as investment income. A country with a big and chronic deficit in the current account can get in trouble. The U.S. does have a chronic deficit in its current account, but it’s not huge: 3% in the last quarter of 2020, vs. nearly 6% in 2006, when it was swollen by the housing bubble.
In his Bloomberg Opinion column, Roach pointed to weakness in net domestic saving measured as a share of gross national income. He wrote, “The 3.8-percentage-point decline in the net domestic rate to negative 0.9% in the second quarter [of 2020] from a positive 2.9% rate in the first quarter was also the largest quarterly decline on record.”
But in the fourth quarter of 2020, the savings measure Roach warned about zoomed back into positive territory: 2.4%. Massive saving by households offset massive borrowing by the federal government. And that’s not all, as this chart shows
While the net saving measure that Roach cites has drifted downward noticeably in recent decades, gross saving has held up significantly better. The main difference between the two is depreciation, which has become more significant because in the high-tech economy, things have shorter useful lives. But Cato Institute Senior Fellow Alan Reynolds pointed out in 2018, in response to an earlier piece by Roach, that measuring net saving against gross income is comparing apples to oranges. An apples-to-apples comparison is gross saving to gross domestic income (or GDI, which equals gross domestic product, or GDP).
The U.S. dollar has defied repeated forecasts of doom. It’s likely to outlive these bearish forecasts as well.
Peter Coy
