US dollar is now on a long-term downward path: Jefferies
New Delhi: The US dollar has likely to be entered in a long-term downtrend because of several economic and political factors that suggest a weaker dollar in the coming years, according to a report by Jefferies.
The report highlighted that on 24 December last year, America reached an all-time high of 67.2 per cent share in the MSCI All Country World Index. This was during a time of strong optimism and talk about "American exceptionalism."
Jefferies noted that this level was already close to breaking out on the charts, and now the breakout has finally happened.
However, the report clarified that this does not mean the US stock market will collapse. The issue is that the US holding 67 per cent of the index is unusually high.
This is especially significant because the US accounts for only 26.4 per cent of the global economy in terms of nominal GDP in US dollar terms and just 14.9 per cent based on purchasing power parity (PPP).
Even when taking into account the large global presence of American tech companies, the number still seems inflated. This large gap suggests that the US dollar is now on a long-term downward path.
Jefferies said "There are several reasons to bet on a weaker dollar. One not unimportant one is that Donald Trump himself wants a weaker dollar".
One reason to expect a weaker dollar, according to Jefferies, is that US President Donald Trump. The report stated that his unpredictable style of governance and frequent policy changes, especially on tariffs, create uncertainty in the market.
This kind of unpredictability can result in a natural discount on the dollar's value.
But the biggest reason, the report mentioned, is the worsening financial condition of the US after the Covid pandemic. The Federal Reserve's generous policies have added to this problem.
The result could be a rise in financial repression, possibly leading to yield curve control and even exchange controls in the future.
This growing gap in savings and the US's increasing debt levels are strong signs that the dollar may continue to weaken in the long run.
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