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What is a secularly weakening US dollar

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While one does not necessarily bet on a weakening US dollar for day trading, a weaker currency is a necessity in the long run.

Precious metals usually benefit from a weaker US dollar. The USD is considered the world's most important reserve currency, and gold and silver are the most responsive to real USD rates compared to any other currency. (The dynamic is similar for oil).

Things like gold and silver are always quoted in whatever currency is the reference point.

Historical Example

In 2019, for example, gold hit new all-time highs in Australian dollars, but still fell short of its then all-time high in 2011 in US dollars. This is because the AUD has simply depreciated more than the USD in gold and relative to many other fiat currencies.

In general, precious metals are an alternative when other currencies are not performing as well in https://online-exness.com/payment-methods/. When real interest rates are low, this reduces the incentive to hold interest-bearing currency.

On a technical level, various entities around the world value the US dollar - reserve managers, sovereign wealth funds, insurance companies, large institutional funds and so on.

The US now accounts for only 20 per cent of global economic activity, but the US dollar accounts for 62 per cent of foreign exchange reserves, 62 per cent of international debt, 57 per cent of global import invoicing, 43 per cent of foreign exchange turnover and 39 per cent of global payments.

Basically, the US will weaken in the long run with its balance of payments deficits, namely a budget deficit and a current account deficit.

Its current account deficit (of which the trade deficit is a component) is about 2 per cent of GDP.

It also has an unsustainable external debt to GDP ratio of 45 per cent. This means that the US has to borrow heavily from foreign entities to finance its deficits. That is even more debt that must eventually be monetised, reducing the value of money relative to various forms of hard assets.

If the US were to run a balanced trade deficit, this would shrink foreign debt as a percentage of GDP.

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Trade surpluses and trade deficits are zero-sum among countries

In other words, large surpluses usually lead to conflict because they mean that deficits exist elsewhere. Deficits have to be financed by issuing debt and cannot always be made reasonable. This is especially true when a country does not have a reserve currency.

Emerging economies do not have a reserve currency (i.e. other countries do not save there) and have problems with deficits because they have to issue debt for which there is not much demand.

In general, it becomes difficult to maintain a surplus or deficit of /- 3 per cent. A surplus country can do this as long as it does not increase its external assets relative to GDP. A deficit country can do so as long as it does not reduce its net foreign assets to GDP ratio.

The US dollar provides security and liquidity, and its debt (US government bonds) is the world's highest reserve asset. This gives the USD great demand at home and abroad.

But the US risks jeopardising this with its finances over time. They rely more on their reputation than on their actual financial health.

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