Needless to say, what would happen if the US dollar weakens? It is not good either for the US or for the rest of the World. Why So?  The answer rests in two sentences. Almost every country is holding its approximately 3/4th of foreign currency reserves in the dollar denominated Securities. World trade volume and movement of foreign capitals are conventionally denominated in US dollars.

On account of such preponderance, The Strength of US dollar is not measured with respect to any single currency rather with an Index called US dollar Index, which is a composite basket of few important currencies.

How has the Dollar been doing in the last few years? It had been declining in strength, losing its purchasing ability and storage value. The US economy which has nearly 75% of GDP component contributed from Services Sector, is extremely sensitive to any slow- down. The US economy has been struggling for nearly a decade and so has been its growth and the Dollar valuation.

What next! US is a net importing nation with substantial Current Account Deficit. Cheaper China goods, Electronic giants operating from Asian Tiger countries and substantial erosion in the fortune of Shell companies have complicated the entire economic activity. American import bill will continue to rise if the Dollar weakens.  At the same time the commensurate gain due to export on account of weakening currency will remain unfavorable given high CAD.  New Government must be having his checklist ready to ensure Current account deficit is addressed favorably and the Currency stabilizes. Or else any further Weakening of the US dollar will have a cascading impact on the Capital market and Banking system both.

On the fiscal front story is even more complicated. Soaring fiscal deficit has not yet stabilized. America has the world highest sovereign debt in absolute amounts among all the countries. Revenue and taxes have to be raised while unproductive expenditure has to be curtailed. It will be too unpopular a decision for the new incumbent, given the way free money as Covid-19 relief is being distributed.  Joblessness and slowing economy has compounded the fiscal prudence at this time.

So who is the beneficiary? Only an astute treasury manager who finds such an opportunity to execute carry trade. Borrow in US dollars and invest in a growing economy elsewhere. Precisely that is what is happening all this while.

While FED is bleeding with dovish monetary stands, treasury operators are making all the gains. The FED holding of all the Sovereign Bonds are substantially held by overseas nations, who are increasingly getting alarmed at the sliding valuation of its dollar denominated Bond. Any sell off by these bond holders would trigger a rise in bond yield leading to complex issues before the US treasury and US capital market.  Or Will FED arrest its Dovish stand and turn to be Hawkish to tame the arbitrageur. That would bring blood in the street of every capital market in the world. Choices are certainly very limited.

Somebody is sniffing this contradiction. Traders are always alert and most important always at the cost of a complacent investor. It has happened in the past.

The US economy is certainly at the edge. Both Fiscal and Monetary stands are for certain scrutiny. US dollar valuation is one important parameter to be watchful about. It is going to be a daunting task before the new US administration, to see how it is able to abridge the CAD, arrest the declining Dollar valuation and restore Investor`s confidence.

Anxious moment to unfold!!!!

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