All in all, we feel the US economy is still in pretty good shape, particularly relative to other developed world economies. One of the reasons for this is the good old US Dollar. Ever since 2008 we have heard from various quarters about the impending decline of the dollar as the world’s reserve currency, how it was going to be displaced by the euro, or the yen, or the renminbi, how we were seeing the end of the Dollar Century. Not only has this not come true, it’s never really even come remotely close to coming true. The US dollar has held up as the world’s reserve currency in spite of monetary easing. Why is this?
First of all, the economic fundamentals of the US economy are relatively good, and we are in a cyclically strengthening position. Furthermore the trajectory of our fiscal deficit is declining relative to GDP, which is typical of a recovering economy. Feeding into this is the fact that the structural side of the US economy versus the potential competitors is in much better shape. Our markets are more flexible, our capacity and history of innovation are more robust, and the boom in US-developed energy all serve to highlight the potential strength of the US dollar. As for the renminbi, even the Chinese do not believe their currency is set to displace the dollar as the world’s reserve currency. In the most recent edition of the People’s Bank of China’s “Official Monetary and Financial Institutions Bulletin” it is stated that for the foreseeable future the global currency system will “operate in a framework of 1+4, with the dollar as the continuing super reserve currency, supplemented by four smaller reserve currencies: the euro and pound in Europe, and the yen and renminbi in Asia.” We certainly agree with that assessment, and also believe that problems such as the opacity and lack of rule-of-law, particularly relating to intellectual property and corporate proprietaries, in China will stretch the “foreseeable future” out well beyond what we can see. To us, all of this means that the US dollar will continue for a long time as the favored reserve currency world-wide, and further points to the possibility of a period of renewed dollar strength. Sustained dollar strength bring potential positives and negatives to the world economy, but that is discussion for another time.
Next week we will be watching Wednesday’s Retail Sales report, Thursday’s Jobless Claims and Producer Price Index reports, and Friday’s Consumer Price Index.