Dollar in free fall: is the world currency in danger?

Since Donald Trump’s inauguration as US President in January, the course of the dollar has tended to have only one direction: downwards. In the first three months of his term, the American currency in retail with the euro lost about ten percent in value. In the meantime, the dollar compared to the euro is as weak as it has not been in over three years.

A weak dollar has advantages for consumers. It was made that are internationally traded internationally, which brakes inflation in Germany and Europe as a whole. On the other hand, a dollar weakness can also have negative consequences for the global economy and fundamentally change the global financial system. The important questions and answers.

Only the dollar fulfills all the necessary conditions for a world currency. Most of the central banks keep their reserves in dollars. Important raw materials are usually traded in dollars and most of the foreign exchange transactions run over the US currency. The United States also offers the largest financial market in the world that is open to all investors.

The huge market for US state bonds is particularly important, in which almost unlimited resources can be invested. China and Japan in particular have put tremendous sums of American bonds in recent years and are among the largest foreign creditors in the United States.

An important reason lies in Trump’s chaotic customs policy, which stirs up a lot of uncertainty and stresses the course of the dollar. In addition, there is a harsh criticism of the US Federal Reserve boss Jerome Powell. On his “Truth Social” platform, Trump described the central bank boss as “Looser”, whose discharge could not come early enough.

Even if Trump has thrown back in the criticism, experts remain skepticism. “We think it is likely that the uncertainty about the independence of the US Federal Reserve Fed will last longer,” says analyst Bernd Weidensteiner from Commerzbank. Trump will attack the US Federal Reserve Fed again and again if it will not lower the interest soon. The uncertainty of the markets can also be seen in the fact that many investors are still protecting against a further crash of the dollar.

One of the greatest advantages is the energy costs. The drop in the price of the dollar makes raw materials that are traded in the US currency tend to be cheaper on the world market. Most recently, ECB President Christin Lagarde has given the assessment that the consequences of US customs policy could even dampen inflation in the euro zone.

In addition, a drop in the dollar has positive effects on the holiday fund of tourists in the USA. The prices for hotels, restaurant visits or rental cars have not changed in the States. But the vacationers from the euro zone get more for their money. However, recent data show that this effect has little influence on the selection of the holiday destination. Rather, the policy of the US government seems to have an impact on tourism. As the US National Travel and Tourism Office announced the youngest, the number of German vacationers in the United States collapsed by almost 30 percent in March.

The markets reacted reflexively with the same pattern to international crises: the course of the US dollar increased and the returns for US state bonds gave up due to higher demand. With the chaotic customs policy of the new US government, however, the well-established processes were overridden. Trump’s aggressive customs policy nourishes doubts about the security of the US financial market. US bonds suddenly came under pressure and were no longer sought as a safe port. However, the United States is likely to do everything possible to maintain the status of the dollar as a global currency. This is the only way to finance the United States at cheap interest rates.

The euro is not an alternative so far, even if it recently benefited from the weakness of the dollar. Implementation of the planned capital market union in the EU could make progress. The euro zone is still a long way from common government bonds. According to experts, it is conceivable in a distant future that there could be several leading currencies. This should also include the Chinese Renminbi if the country continues to open. Trump’s policy could accelerate this process.

During his first term, Donald Trump repeatedly complained that the United States is treated “unfair” in international trade. While successful export nations like Germany show a huge surplus in the trade balance, the USA has a chronic deficit. Due to a drop in the US currency, American goods abroad become cheaper, which could boost exports. At the same time, imports to the US are slowed down by aggressive customs policy. In this way, Trump wants to reduce the trade deficit. A strategy that many experts assess as not very helpful.