Central Bank Governors Meet in Portugal to Ask for Answers to One Question: Where is the Dollar Going?

Aydınlık newspaper writer Michael Roberts discussed the meeting of central bank governors in Portugal and the future of the dollar and the euro in his column titled " Dollar and Euro ".

"This week, the world's leading central bankers gathered in the sweltering heat of Sintra, Portugal. The key issue, according to the financial media, is whether the U.S. dollar will continue to fall, bringing to the forefront the end of the dollar's dominance of world markets and, with it, the U.S.'s "exorbitant privilege" in controlling the supply of the world's main trade and financial currency," Roberts wrote.

DOLLAR FALLS TO ITS LOWEST LEVELS

It is true that the dollar has fallen to three-and-a-half-year lows against other major currencies since Donald Trump took office in January. Trump’s tariff tantrums and harsh reversals have heightened uncertainty about international trade and whether investors will hold their purchases and assets in dollars.

But is that the real reason for the dollar's decline? First, the US dollar may be at a three-year low against other currencies, but that's only because it's at historic highs. Over a much longer period, the dollar is nowhere near as weak as the euro, pound, yen or renminbi (Chinese yuan).

The dollar has fallen nearly 9 percent since January, with a 4.5 percent drop in April alone, but even after the impact of Trump’s tariff crisis, the dollar index remains relatively close to where it was a decade ago.

INTEREST RATE PRESSURE

In my view, the main reason for the recent weakness of the dollar against the euro and other currencies is the slowdown in the U.S. economy and the pressure on the Federal Reserve to lower the policy rate to reduce borrowing costs, mortgage rates and the cost of servicing debt for businesses and households.

Fed Chairman Powell is under immense pressure to cut interest rates, which Trump is reluctant to do because he expects the tariff measures to lead to a spike in consumer inflation. Trump is demanding Powell resign immediately so he can appoint a Fed chair who will lower interest rates.

The Fed’s monetary policy committee (FOMC) is split on whether to keep interest rates high to supposedly reduce inflation or instead lower them to help the U.S. economy. This dilemma is actually a false dichotomy because monetary policy implemented by central banks does little to “manage” capitalist economies, whether it is to “control inflation” or “boost growth.”

However, expectations are growing that the Fed will accelerate rate cuts over the rest of this year, thereby narrowing the gap between U.S. interest rates and those in Europe and Japan. This will make holding dollar assets less attractive and keep the dollar weaker than before.

HEGEMONY OF THE DOLLAR

But none of this means that the dollar will lose its hegemonic position in world markets. To think so is wishful thinking at best, and a terrible misjudgment of the strength of other major economies. ECB President Lagarde applied some of this wishful thinking a few weeks ago when she said: “The euro could become a viable alternative to the dollar… creating an opportunity for a ‘global euro moment.’” Seriously! Hasn’t Lagarde noticed the stagnation of major European economies?

Here are the latest annual growth figures for leading economies:

India 7.4 percent, China 5.4 percent; Brazil 2.9 percent, Canada 2.3 percent. USA 2.0 percent, Japan 1.7 percent, Russia 1.4 percent, UK 1.3 percent, South Africa 0.8 percent; Italy 0.7 percent, France 0.6 percent, Germany 0.

Among the G7's largest economies, Canada and the US are doing twice as well as European economies. European economies are stagnating; only the US is beginning to join the stagnating European economies. The latest US real GDP figures show a 0.5% decline, while US manufacturing remains in contraction territory (below 50 in the chart).

That’s why the dollar is weak and the Fed is likely to cut interest rates. But the dollar still accounts for 58 percent of international reserves, well above the euro’s 20 percent share. That’s just Lagarde’s wishful thinking.

WHO IS MICHAEL ROBERTS?

Michael Robets is a Marxist economist who worked as an economist in the financial centre of the City of London for over thirty years and is the author of books including The Great Recession (2009) and The Long Depression (2016).

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