(Yicai) April 22 — The US Dollar Index has recently weakened and raised questions about whether the greenback will keep its dominance or collapse, with Stephen Dover saying that the Euro is popular, but the dollar’s reserve currency status remains hard to shake.
“I don’t know if they would want the US dollar to be the reserve currency, but they’d like a pretty massive devaluation of the dollar and a restructuring of the foreign debt,” Dover, who is chief market strategist and head of Franklin Templeton Institute at US asset management giant Franklin Templeton, said in a recent interview with Yicai. “I don’t think it’s likely to happen, but it is something to consider in the direction that they would like to go.”
The US Dollar Index, a measure of the greenback’s value relative to a basket of other currencies, fell to around 98.6 yesterday, the lowest level over the past three years. The Japanese Yen and the Euro have appreciated by 5 percent to 10 percent against the US dollar since the start of this year.
The dollar was previously overvalued by 10 to 20 percent, stemming from the US’ superior asset return rates attracting global capital inflows over the past decade or more, according to Wall Street investment banks. However, the new tariffs will hit US firms’ profits and American families’ consumption power, undermining the core pillar of the strong dollar.
“I don’t think it’s a MEGA (Make Europe Great Again) moment, but so the short answer is we’re positive on Europe,” Dover said. “The longer answer is that we have thought, and I’ve said for at least the last six months, we thought the market was going to broaden, that those Maga-7 companies were overvalued and there’s more value in other parts of the market, including overseas.
“So let’s go back to before Germany’s fiscal expansion, Europe was just relatively cheap compared to the US, by the way, so is China,” Dover noted. “So, just all things being equal, it makes sense that tactically, those countries would have a jump.”
Weakening the dollar has become the core idea of the “Mar-a-Lago Accord,” a plan to get other economies to agree to pump up their currencies and help devalue the greenback, with increasing tariffs to protect US manufacturing and boost revenue also one of the themes.
The agreement comes from the “A User’s Guide to Restructuring the Global Trading System” report released by Stephen Miran, chairman of the White House Council of Economic Advisers, last year. The Harvard-graduated economist said that one of the core issues facing the US derives from the special status of the dollar as the world’s primary reserve currency, leading to its long-term overvaluation, which has harmed the competitiveness of US manufacturing and exacerbated the trade deficit.
“It’s troubling that Stephen Miran is the most senior economist in Trump’s administration,” Dover said. “We have to be careful because there are a lot of different camps, and it’s unclear what Trump thinks. He’s confusing when he talks about the dollar because he talks both about wanting a strong dollar and wanting it to be weaker, but he wants it to be the reserve currency.
“Remember, he threatened emerging countries that were looking to band together to have another currency,” Dover pointed out. “We don’t know what Trump thinks, but there are those in his administration who think that the dollar being the reserve currency has actually been bad for the US because the US then doesn’t produce things.
“If I may go back to the retaliatory tariffs and those numbers, we knew they didn’t make sense when they came out, but they were basically just based on the amount of the trade deficit,” Dover said. “So what Trump is, in essence, saying is he does not want to trade deficit. That means that other countries could lower their tariffs to zero.
“I’m thinking of Vietnam, which doesn’t have very high tariffs anyway, but it would still have a trade deficit with the US,” Dover added. “It doesn’t make sense for Vietnam to have a really high currency. Vietnam’s GDP is not large enough to purchase whatever in the US.
“There are a lot of very mixed and confusing messages, and that’s the real thing that’s happening with our clients and with our investors,” according to Dove.
Given that the new administration of President Donald Trump wants the dollar to weaken moderately to boost export competitiveness, the US will try to encourage the yen to appreciate in the recent negotiations with Japan, Dover pointed out.
Many institutions seek options to diversify risks, including gold and Euro assets.
The standard theory of exchange rates holds that fiscal expansion will drive up the value of the domestic currency because it will bring stronger growth and higher real interest rates, Dover said, adding that the recent strengthening of the Euro is in line with this logic.
The Euro might have been even stronger if not for the European Central Bank’s simultaneous monetary policy easing, according to Dover. With the Federal Reserve expected to start a rate-cutting cycle later this year, the Euro will likely further appreciate against the dollar, he added.
Editor: Martin Kadiev
