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#1 28-08-2020 10:48:59

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 2910

EUR/USD: No weakening of the USD despite its downward trend

EUR/USD: No weakening of the USD despite its downward trend

One of traders' biggest worries is that a central bank will devalue its currency. In the world of monetary policy, devaluation refers to a sharp drop in the value of a currency. So sharp that it dilutes the value of the various investments denominated in that currency.

The US Fed has recently generated such fears. And for good reason. The USD has fallen across the board on the currency dashboard, with little or no rebound.

The problem is that, while the dollar is the world's reserve currency and most of the world's debts are denominated in dollars, other currencies are appreciating. Therefore, while a weaker USD is good for the competitiveness of American exports, it hurts other countries' exports.

At what point does too much really become too much?

The fear is that the upcoming presidential election could trigger a new cycle of dollars flooding the markets. Congress is already considering a new fiscal stimulus package, which will further widen the M2 gap between the US and the rest of the world. If this is the case, the current USD consolidation is nothing more than a consolidation, and a new lower leg will start.

Yet if we look at the USD's share of central bank reserve ratios, we see that the world has no alternative to the USD as a reserve currency. While the ratio has declined over the past two decades, the world still has confidence in the USD and its ability to preserve value. Therefore, devaluation theories are out of context as long as the USD's share of the world's central bank reserves remains relatively stable.

So where are all the USDs the Fed is printing? Much of it is in the Treasury account. If you have more but you keep it, its price remains relatively stable. The diamond industry is a good example of this.

The Fed's task is to find a way to keep the USD relatively stable while printing continues until the pandemic goes away. Judging by the Fed's performance in the previous crisis, this is by far the most difficult crisis it has ever faced.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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