How long does the US dollar last

The dollar is amazingly strong - how much longer?

The American currency has been counted many times. So far, the exchange rate has developed comparatively robustly. That can change quickly depending on the scenario.

The discussion about the future of the American dollar has been stirring for some time. Conspiracy theorists argue that the greenback will soon lose its importance because countries like China and Russia wanted to free themselves from the "dollar hegemony" as soon as possible. Others fantasize that conventional currencies will soon be replaced by cryptic competitors anyway. The realists, on the other hand, see that the dollar will not be able to be replaced as a world currency anytime soon, but they do expect it to weaken. President Donald Trump even tries to conjure up such weakness on opportunistic grounds. The American currency is not particularly strong and the euro is not particularly weak - in contrast to other currencies such as the Chinese yuan or the Japanese yen.

In demand good. . .

In fact, the dollar has risen by a good 27% since July 2011, measured against the real, trade-weighted exchange rate index of the Bank for International Settlements, and is holding up well at the level it has reached. This year alone, it has temporarily gained up to 100% against individual currencies such as the Turkish lira or the Argentine peso, since rising dollar interest rates and the beginning of the shrinking of the US central bank balance have led to a less generous supply of dollar liquidity to the financial markets worldwide.

Even against the Swiss franc and the euro, the dollar has risen by up to 10% since the turbulence began in early February. During the past week it took up to CHF 1.0125 to buy one unit of American currency. The euro, on the other hand, fell to $ 1.1225 - its lowest level in about a year and a half.

The dollar - it's not that strong either

Trade-weighted exchange rate index (real effective exchange rate) Deviation from the mean, in points

There are several reasons for the relative strength of the dollar. The first and probably the most important is the fact that the US Federal Reserve has been turning the interest rate screw for a while. In this context, it has increased the key interest rate from 0.25 to 2.25%, while the European key interest rate remains at zero and that of Switzerland is even in negative territory. If one believes the statements of Federal Reserve Chairman Jerome Powell, then in view of the persistently low real interest rate, further upward steps are as good as certain.

Some of his statements even suggest that the Federal Reserve's rate-determining body could go further with this policy than the market has previously expected. As a result of this strategy, the interest rate gap has widened more and more compared to other currency areas, which has led to considerable cash inflows in recent months. Investors from Europe and other parts of the world have recently become even more drawn to the yields of short-term US interest-bearing paper than to Treasuries with longer-term maturities.

The second reason is the started and planned reduction of the central bank balance sheet. It will lead to billions being withdrawn from the global capital markets month after month. After all, the Fed's purchases of securities in the past were offset by corresponding payouts, which are now lower and lower at a high level.

If one believes critical experts, this process has not only led to a shortage of the dollar supply available worldwide in the past few months, but also indirectly triggered the turbulence on the world stock exchanges and especially in the emerging countries. Indeed, in this context, states and companies have come under pressure which in the past had relied heavily on cheap dollar loans and which now suddenly have to cope with higher refinancing costs. If one believes skeptical analysts, only the first symptoms of the difficulties that may come have so far emerged. They expect the dollar to get stronger rather than weaker for the time being due to the continued demand for hedging transactions and the deterioration in the quality of dollar loans.

Third, the dollar is benefiting from the continued strong growth of the American economy. So far it has been growing comparatively robustly, while in Europe and Asia the dynamics are already waning slightly. This is a strange constellation that can be traced back to the protectionist strategy of the US government, which stimulates the domestic market but also drives up prices. In addition, there is the fact that the busy economy is being further stimulated by the expansive fiscal policy financed with enormous credit growth. This combination almost inevitably leads to rising interest rates and yields, which in turn makes the dollar attractive in the short term.

. . . on a fragile basis

However, the question is how long this can go on. Should the economic development in the USA be adversely affected by the recent turbulence in the financial markets, a sudden change in sentiment threatened with regard to the dollar. For example, if the Fed were to dampen interest rate expectations and if the European Central Bank were even to hint at a less generous strategy than previously expected, a sudden sell-off of the dollar would hardly come as a surprise.

The hot money of investors who only wanted to benefit from the comparatively high US interest rates and yields and who have no long-term interests would quickly flow back abroad. It is possible that those emerging markets that have suffered in recent months will benefit from this - at least temporarily.