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Of Course the U.S. Dollar Will Get Stronger

Rodney Johnson+ ,  February 3, 2014

Our research is based on people and how they spend money in predictable ways over the course of their lives.

We, as consumers, spend a lot when we’re young. We take on a bunch of debt (for homes, cars, etc.) as we begin to raise a family. Then we pay down our debt and save for retirement.

It’s pretty straightforward, which is why so many people, when they read or hear our economic analysis, tend to agree with us.

We end up hearing the general refrain: “Of course having a bunch of Boomers spending money drove the economy higher… Of course this changed as the group refocused on paying down debt and saving… Of course the natural trend is deflation… Of course the U.S. dollar will get stronger.”

Oh, hey, wait a minute. Take back that last one!

 

This is where we get the most friction and pushback from readers and other analysts.

“There is no way the U.S. dollar will get stronger,” they say.

“The Fed is printing money by the truckload. China is growing in importance every day. Other countries continually call for re-pricing international markets, like oil, away from the U.S. dollar,” they say.

“Clearly, in this one area, you’re wrong,” they say.

There’s just one problem with this anti-dollar view. That is: People are using more of the U.S. dollar today, not less.

The Bank of International Settlements (BIS) conducts a survey every three years on the use of currencies. The last one was in 2013.

One of the measures in the survey shows the percentage of foreign currency transactions that include each currency listed. Comparing the 2010 figures to the 2013 results, the U.S. dollar gained ground, moving up by 2%, and remained the most commonly used currency in the world.

The euro, while hanging on to its ranking as the second-most used currency, fell by 5.7%.

But these results aren’t what is so impressive… it’s the gap between the two that really sticks in your mind.

The U.S. dollar was involved in 87% of all foreign currency transactions in April 2013. The euro — remember, the second-most used currency — was involved in only 33.4% of all transactions. And the gap between the two is getting bigger, not smaller.

As for the Chinese renminbi… well, it gained ground also.

 

It moved from being included in 1% of transactions to a whopping 2.2%. The percentage gain is huge, but the absolute number is almost a rounding error.

The facts that people quote when challenging our view of a stronger dollar certainly exist.

The Federal Reserve is printing a mountain of money.

The Chinese are flexing their monetary muscle in the international markets.

Traders and investors around the world have long expressed a desire to move away from the U.S. dollar.

However, these forces are not strong enough to challenge, much less change, the dominant position of the U.S. dollar in the near future.

The reason is that no currency currently serves as a reserve of anything. The idea that there is a preservation of value in any currency went out the door with the gold standard more than four decades ago.

Today, every currency is simply a floating gauge of value in relation to other currencies, with none of them backed by gold, oil, wheat, land, or anything else.

So the question of what currency will dominate markets comes down to matters like trade, ease of comparison, and the efficiency of transactions.

Looked at from this point of view, the choice of the U.S. dollar is a no-brainer. It’s widely held, easily converted, and is paired with every currency so that local prices are immediately understood by all parties.

The only way to unseat the U.S. dollar is to have our economic growth drop dramatically, while every other major currency player enjoys a major expansion. The possibility of these two trends occurring at the same time seems remote, to say the least, particularly when our research calls for just about the opposite.

The U.S. is in the strongest position among the major players, so instead of losing ground, the U.S. dollar should enjoy further gains. As that happens, investors who have positioned themselves for a falling dollar will see their positions take a hit.

They’d be better off if they learned to give the U.S. dollar a little love ahead of time.