1 00:00:02,400 --> 00:00:09,640 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and 2 00:00:09,760 --> 00:00:12,360 Speaker 1: this is Here's Why, where we take one new story 3 00:00:12,400 --> 00:00:14,560 Speaker 1: and explain it in just a few minutes with our 4 00:00:14,600 --> 00:00:16,360 Speaker 1: experts here at Bloomberg. 5 00:00:20,560 --> 00:00:23,400 Speaker 2: Mister President, with the current value of the dollar, do 6 00:00:23,480 --> 00:00:26,000 Speaker 2: you think it's declined too much? No, I think it's great. 7 00:00:26,079 --> 00:00:27,680 Speaker 2: I've been the value of the dollar. Look at the 8 00:00:27,680 --> 00:00:31,280 Speaker 2: business with no dollar. Dollar's doing great. 9 00:00:32,400 --> 00:00:35,360 Speaker 1: Donald Trump might not be worried about the dollars weakness, 10 00:00:35,640 --> 00:00:40,320 Speaker 1: but investors are certainly taking notice. You know, in some ways, 11 00:00:40,360 --> 00:00:44,080 Speaker 1: the political tail is wagging the kind of the economic dog, 12 00:00:44,240 --> 00:00:45,600 Speaker 1: at least temporarily. 13 00:00:45,800 --> 00:00:49,199 Speaker 2: You know, it's very unusual to have people revising the 14 00:00:49,280 --> 00:00:52,920 Speaker 2: US economy forecasts higher and hire, and the markets selling 15 00:00:52,920 --> 00:00:53,600 Speaker 2: the dollar like this. 16 00:00:54,080 --> 00:00:57,080 Speaker 3: Yes, it is true a weaker dollar boosts exports. However, 17 00:00:57,320 --> 00:00:59,560 Speaker 3: we have in the United States has thirty nine trillion 18 00:00:59,600 --> 00:01:02,400 Speaker 3: of debt on its way to forty trillion plus. The 19 00:01:02,560 --> 00:01:06,040 Speaker 3: US government does need to be very careful because there 20 00:01:06,080 --> 00:01:08,760 Speaker 3: is already a sense that the dollar is no longer 21 00:01:08,800 --> 00:01:13,399 Speaker 3: the reserve currency. For several years now, market participants have 22 00:01:13,480 --> 00:01:17,440 Speaker 3: been looking for an alternate reserve currency to the US dollar. 23 00:01:17,840 --> 00:01:20,039 Speaker 3: You're seeing that in gold now. 24 00:01:21,040 --> 00:01:23,679 Speaker 1: In the twelve months after Donald Trump returned to the 25 00:01:23,720 --> 00:01:27,320 Speaker 1: White House, Bloomberg's Dollar Index dropped by more than seven percent. 26 00:01:27,840 --> 00:01:31,880 Speaker 1: The US currencies under pressure from worries including rising deficits, 27 00:01:32,080 --> 00:01:36,720 Speaker 1: the independence of the Federal Reserve, and trade frictions. Twenty 28 00:01:36,760 --> 00:01:39,480 Speaker 1: twenty six has brought new challenges that have pushed the 29 00:01:39,480 --> 00:01:43,039 Speaker 1: dollar to its lowest level in four years. Here's why 30 00:01:43,080 --> 00:01:49,680 Speaker 1: a weaker dollar is ringing alarm bells. Our Market's Live 31 00:01:49,720 --> 00:01:53,640 Speaker 1: executive editor Mark Coudmore joins us now for more. Mark, 32 00:01:53,680 --> 00:01:55,720 Speaker 1: First of all, can you put these moves in context 33 00:01:55,840 --> 00:01:59,000 Speaker 1: for us? How significant has the weakening of the dollar 34 00:01:59,120 --> 00:02:00,600 Speaker 1: been over the past last year? 35 00:02:01,320 --> 00:02:03,760 Speaker 2: If you take it from the February twenty twenty five peak, 36 00:02:04,040 --> 00:02:06,440 Speaker 2: it did spike into earlier twenty twenty five at the 37 00:02:06,440 --> 00:02:09,440 Speaker 2: Bloomber Dollar Index is down about eleven percent since then, 38 00:02:09,880 --> 00:02:13,000 Speaker 2: which sounds extremely dramatic, and it is dramatic, But I 39 00:02:13,000 --> 00:02:14,919 Speaker 2: should say that you know, moves that magnitude have them 40 00:02:14,919 --> 00:02:17,480 Speaker 2: been too unusual over the past decade. In fact, this 41 00:02:17,560 --> 00:02:20,200 Speaker 2: is the fourth move of such a scale over the 42 00:02:20,240 --> 00:02:24,280 Speaker 2: past ten years. Now we're getting towards the extreme move 43 00:02:24,280 --> 00:02:27,160 Speaker 2: we've seen in that era that the largest peaked trough 44 00:02:27,240 --> 00:02:30,119 Speaker 2: drawed out of the past fifteen years is only fourteen 45 00:02:30,160 --> 00:02:32,480 Speaker 2: point three percent. And at the pace we've moved in 46 00:02:32,480 --> 00:02:34,960 Speaker 2: the last few days, if that continued at such pace, 47 00:02:34,960 --> 00:02:36,880 Speaker 2: which might be extreme, you know, we could get there 48 00:02:36,960 --> 00:02:39,959 Speaker 2: very very quickly. Some extra context is that the dollar 49 00:02:40,480 --> 00:02:42,720 Speaker 2: was very elevated into the end of twenty twenty four, 50 00:02:43,000 --> 00:02:46,360 Speaker 2: even more so into early twenty twenty five. I's said 51 00:02:46,440 --> 00:02:48,840 Speaker 2: it kind of rose into a peak in February. So 52 00:02:48,919 --> 00:02:52,000 Speaker 2: despite the big drawed in, we're not far below the 53 00:02:52,040 --> 00:02:54,320 Speaker 2: ten year average, despite the drop, and that's been a 54 00:02:54,440 --> 00:02:55,880 Speaker 2: rising ten year average as well. 55 00:02:56,360 --> 00:02:58,640 Speaker 1: So let's get into what's been driving this then. How 56 00:02:58,720 --> 00:03:00,840 Speaker 1: much of it is about parlas that have come from 57 00:03:00,840 --> 00:03:01,760 Speaker 1: the Trump White House? 58 00:03:02,440 --> 00:03:04,960 Speaker 2: A lot of it really. So the dollar is expensive. 59 00:03:05,200 --> 00:03:08,359 Speaker 2: It probably should be expensive, given the structural advantages it's 60 00:03:08,639 --> 00:03:11,800 Speaker 2: had for some time in many ways for decades, in 61 00:03:11,880 --> 00:03:15,799 Speaker 2: terms of deep capital markets, rule of law, strong growth, 62 00:03:15,840 --> 00:03:18,959 Speaker 2: great demographics, lots of commodities, et cetera. It's got many 63 00:03:18,960 --> 00:03:21,040 Speaker 2: reasons to you to be positive. But on a purchasing 64 00:03:21,040 --> 00:03:24,480 Speaker 2: power parity basis only really Swiss Franken is ready Sheckler 65 00:03:24,600 --> 00:03:26,920 Speaker 2: much more expensive. In fact, as of this week, Ossie 66 00:03:26,919 --> 00:03:29,040 Speaker 2: dollar is kind of maybe passed it out, depending on 67 00:03:29,120 --> 00:03:31,160 Speaker 2: exactly which day you looked, but it's pretty similar. So 68 00:03:31,200 --> 00:03:32,880 Speaker 2: it's one of the most expensive currents in the world 69 00:03:32,880 --> 00:03:35,720 Speaker 2: now purchasing power parity bases, and it probably should be, 70 00:03:35,760 --> 00:03:39,160 Speaker 2: but it does. As a result, it's got building structural negatives. 71 00:03:39,160 --> 00:03:40,960 Speaker 2: Now they've been there for a while. The US has 72 00:03:41,000 --> 00:03:44,200 Speaker 2: got twin deficits, a large budget deficit that's been been 73 00:03:44,200 --> 00:03:46,640 Speaker 2: adding to its massive debt burden, and it's also got 74 00:03:46,680 --> 00:03:48,760 Speaker 2: a current account deficit. So those kind of negatives have 75 00:03:48,760 --> 00:03:52,560 Speaker 2: been there for some time. What has changed is Trump's policies, 76 00:03:52,720 --> 00:03:56,080 Speaker 2: I think, particularly around trade. But you can't ignore the 77 00:03:56,400 --> 00:04:01,280 Speaker 2: administration's pressure on the federal reserve, which is encouraging easier 78 00:04:01,320 --> 00:04:05,320 Speaker 2: monetary policy than orthodox economics would suggest. But around trade 79 00:04:05,360 --> 00:04:07,920 Speaker 2: in particular, it's the fact that, you know, unlike in 80 00:04:07,960 --> 00:04:10,720 Speaker 2: his first term, he attempted to start a trade war 81 00:04:10,800 --> 00:04:14,280 Speaker 2: with pretty much everyone at once, and it's that multilateral fighting, 82 00:04:14,280 --> 00:04:16,159 Speaker 2: if you want to call it a multi fund fighting 83 00:04:16,200 --> 00:04:17,480 Speaker 2: maybe is a better way to put it. That has 84 00:04:17,520 --> 00:04:19,600 Speaker 2: been so damaging for the dollar, and then it's kind 85 00:04:19,600 --> 00:04:23,280 Speaker 2: of been the whiplash since then, Ultimately you're losing policy 86 00:04:23,320 --> 00:04:25,880 Speaker 2: certainty and trading with the US. So the post World 87 00:04:25,960 --> 00:04:28,920 Speaker 2: War two era has meant that every part of the world, 88 00:04:29,000 --> 00:04:31,960 Speaker 2: if you're a business owner, you prefer to be in 89 00:04:32,000 --> 00:04:35,080 Speaker 2: a supply chain with the US, both with US companies 90 00:04:35,120 --> 00:04:37,400 Speaker 2: and the US consumer. Not only was the biggest market, 91 00:04:37,480 --> 00:04:39,920 Speaker 2: but you could rely on that market and you can 92 00:04:40,040 --> 00:04:43,719 Speaker 2: rely on rule of law. And therefore, if you're a supplier, 93 00:04:43,720 --> 00:04:46,560 Speaker 2: you'd offer cheaper prices to supply to the US than 94 00:04:46,600 --> 00:04:48,280 Speaker 2: to some other countries in the world because it was 95 00:04:48,320 --> 00:04:51,280 Speaker 2: better to get supply chain. And therefore the US had 96 00:04:51,279 --> 00:04:53,200 Speaker 2: a discount for trading US to the world, and that's 97 00:04:53,240 --> 00:04:56,000 Speaker 2: being eroded. Suddenly, the US is going from being the 98 00:04:56,279 --> 00:05:01,280 Speaker 2: most preferred trading partner to arguably less. Now maybe that's 99 00:05:01,320 --> 00:05:03,080 Speaker 2: going too far for the moment, but certainly it's got 100 00:05:03,160 --> 00:05:05,800 Speaker 2: no special status. So that's making it more expensive to 101 00:05:05,839 --> 00:05:08,040 Speaker 2: trade at the US, and that's decreasing the interest in 102 00:05:08,120 --> 00:05:10,159 Speaker 2: the dollar. I think the extra context here is that 103 00:05:10,279 --> 00:05:13,640 Speaker 2: the world was over exposed the dollar for good reason, 104 00:05:13,800 --> 00:05:17,680 Speaker 2: even despite those negatives. So Trump's policies have been the catalyst, 105 00:05:17,839 --> 00:05:20,080 Speaker 2: and they've been a very real catalyst, but they've not 106 00:05:20,240 --> 00:05:24,760 Speaker 2: necessarily completely destroyed some of the underlying fundamental negatives. They've 107 00:05:24,800 --> 00:05:27,119 Speaker 2: just made people care about those twin deaths. It's because 108 00:05:27,120 --> 00:05:29,520 Speaker 2: of that new policy uncertainty and because of that pressure 109 00:05:29,560 --> 00:05:29,960 Speaker 2: on the Fed. 110 00:05:30,520 --> 00:05:33,080 Speaker 1: So how far could this trend of weakness and the 111 00:05:33,120 --> 00:05:35,960 Speaker 1: dollar go? Then? Could this be something that's a permanent 112 00:05:36,000 --> 00:05:38,240 Speaker 1: shift away given that policy backdrop? 113 00:05:38,680 --> 00:05:42,279 Speaker 2: So personally, I'm expecting another five percent down the Bloomberg 114 00:05:42,279 --> 00:05:45,600 Speaker 2: Dollar Index this year. I tend to be a dollar bear, 115 00:05:45,640 --> 00:05:47,080 Speaker 2: and I kind of expect we'll get down to the 116 00:05:47,120 --> 00:05:48,599 Speaker 2: level they'll be bring us down to the lows of 117 00:05:48,760 --> 00:05:52,159 Speaker 2: chas and eighteen twenty twenty twenty one. There's a not 118 00:05:52,400 --> 00:05:56,720 Speaker 2: insignificant minority risk of a much more dramatic decline over 119 00:05:56,760 --> 00:05:58,599 Speaker 2: the coming years. Say, if you go back to the 120 00:05:58,640 --> 00:06:01,880 Speaker 2: lows of eight tensand leves, that would mean another twenty 121 00:06:01,880 --> 00:06:04,640 Speaker 2: percent plus decline from here in the Bloomberg Dollar Index. 122 00:06:04,760 --> 00:06:06,520 Speaker 2: And if that's the case, the worldould be in trouble 123 00:06:06,520 --> 00:06:09,119 Speaker 2: because the reasons to buy the alternatives like the euro 124 00:06:09,400 --> 00:06:11,560 Speaker 2: and the yen and the yuan and other fear occurrences 125 00:06:11,600 --> 00:06:13,800 Speaker 2: are much less compelling than before. So when we were 126 00:06:13,800 --> 00:06:16,760 Speaker 2: doing that. Going into the GFC global financial crisis, we 127 00:06:16,880 --> 00:06:19,880 Speaker 2: believe that, hey, the Euro is suddenly a viable reserve currency, 128 00:06:19,880 --> 00:06:22,120 Speaker 2: and maybe the yuan is too, and but we've undermined 129 00:06:22,120 --> 00:06:24,960 Speaker 2: all that, and certainly Japan has undermined that. So if 130 00:06:24,960 --> 00:06:26,919 Speaker 2: the dollar really does fall that much, it means an 131 00:06:26,960 --> 00:06:29,720 Speaker 2: extraordinarily high inflation period for not just for the US, 132 00:06:29,760 --> 00:06:32,599 Speaker 2: but probably for the world, and probably a lot more volatility. Now, 133 00:06:32,920 --> 00:06:35,200 Speaker 2: are we set for a permanent shift away from the dollar? 134 00:06:35,400 --> 00:06:37,880 Speaker 2: The answer is yes, but not in the way people think. 135 00:06:38,080 --> 00:06:39,920 Speaker 2: We have been in a permanent shift away from the 136 00:06:39,960 --> 00:06:42,400 Speaker 2: dollar for a number of years. No, dedollarization is a 137 00:06:42,440 --> 00:06:46,240 Speaker 2: real underlying trend, but it's not how it gets sometimes 138 00:06:46,600 --> 00:06:49,680 Speaker 2: brought by some kind of panicmongers to extremity. What it's 139 00:06:49,720 --> 00:06:53,640 Speaker 2: saying is is that people want to reduce their reliance 140 00:06:53,640 --> 00:06:55,800 Speaker 2: and the dollar, but it's still going to remain the 141 00:06:55,839 --> 00:06:57,839 Speaker 2: most dominant currents in the world. It's still the world's 142 00:06:57,880 --> 00:07:00,760 Speaker 2: reserve currency. So it's just that that dependence and it 143 00:07:00,760 --> 00:07:02,680 Speaker 2: will decline a little bit of the margin, and that 144 00:07:02,760 --> 00:07:05,479 Speaker 2: has been established trend. It's a trend that's set to 145 00:07:05,480 --> 00:07:07,960 Speaker 2: get more but is to go even further. So I 146 00:07:08,040 --> 00:07:12,400 Speaker 2: expect that dollars share of global FX reserves, for example, 147 00:07:12,680 --> 00:07:15,400 Speaker 2: I think was fifty seven percent as of the last quarter. 148 00:07:15,600 --> 00:07:18,120 Speaker 2: Correct me if it's five percenty but around there. I 149 00:07:18,200 --> 00:07:20,840 Speaker 2: expect in the next few years under Donald Trump's term, 150 00:07:20,880 --> 00:07:23,280 Speaker 2: it could be below fifty percent, but will still even 151 00:07:23,320 --> 00:07:26,200 Speaker 2: if it goes below fifty percent, still be far bigger 152 00:07:26,200 --> 00:07:29,840 Speaker 2: than the share of any other fit currency out there. So, yes, 153 00:07:30,080 --> 00:07:32,560 Speaker 2: there is a permanent shift aware in the dollar. That 154 00:07:32,600 --> 00:07:35,520 Speaker 2: permanent shift the ware dollar is accepted to intensify. This 155 00:07:35,600 --> 00:07:38,320 Speaker 2: is not about abandoning the dollar. There is no viable 156 00:07:38,360 --> 00:07:40,720 Speaker 2: alternative just yet. And if we get to a world 157 00:07:40,840 --> 00:07:43,760 Speaker 2: where we truly abandon the dollar, watch out. That's the 158 00:07:43,960 --> 00:07:47,559 Speaker 2: kind of real Panicmonger's zombie apocalypse type world. 159 00:07:48,040 --> 00:07:51,240 Speaker 1: So should we be disconnecting then, dollar weakness from the 160 00:07:51,360 --> 00:07:53,640 Speaker 1: question of the dollar as a reserve currency. 161 00:07:54,440 --> 00:07:57,800 Speaker 2: Great question, and I would say, yes, it's not. They 162 00:07:57,880 --> 00:08:00,080 Speaker 2: may disconnect entirely, but I don't think they should be 163 00:08:00,120 --> 00:08:05,640 Speaker 2: so closely entwined. Dollar weakness is very likely to continue. 164 00:08:06,120 --> 00:08:08,800 Speaker 2: The dollar has been the world's reserve currency for decades, 165 00:08:08,840 --> 00:08:12,920 Speaker 2: and it has had depreciation trends and appreciation trends. As 166 00:08:12,920 --> 00:08:17,200 Speaker 2: I said, we're still you know, like roughly twenty five 167 00:08:17,200 --> 00:08:19,360 Speaker 2: percent above where we weren't tes and eight, and that 168 00:08:19,480 --> 00:08:22,440 Speaker 2: was after a multi year depreciation trend that didn't see 169 00:08:22,440 --> 00:08:24,880 Speaker 2: the dollar replaced US the world's reserve currency. It just 170 00:08:24,920 --> 00:08:29,320 Speaker 2: saw its share of reserves decline. So the world is 171 00:08:29,680 --> 00:08:31,720 Speaker 2: going to continue moving away from the dollar. The dollar's 172 00:08:31,720 --> 00:08:34,320 Speaker 2: share of world reserves is going to continue happening, and 173 00:08:34,440 --> 00:08:38,320 Speaker 2: probably at an accelerated pace, but it will remain the primary 174 00:08:38,760 --> 00:08:41,720 Speaker 2: reserve currency of the world for a long long time 175 00:08:41,760 --> 00:08:44,880 Speaker 2: to come. Unless we're in complete panic stations about all 176 00:08:44,960 --> 00:08:45,959 Speaker 2: financial markets. 177 00:08:46,240 --> 00:08:49,880 Speaker 1: What could reverse this? What could drive investors back to 178 00:08:49,920 --> 00:08:51,280 Speaker 1: the dollar as a safe haven. 179 00:08:52,040 --> 00:08:54,439 Speaker 2: So what's really interesting is about all this is that 180 00:08:54,480 --> 00:08:56,599 Speaker 2: the corollary of what I'm saying there is that in 181 00:08:56,760 --> 00:09:01,080 Speaker 2: extreme risk aversion, despite this trend away for the dollar, 182 00:09:01,160 --> 00:09:03,840 Speaker 2: it'll still work as a haven in risk a version, 183 00:09:04,080 --> 00:09:07,400 Speaker 2: it just won't be the first port of call. And again, 184 00:09:07,440 --> 00:09:10,080 Speaker 2: you can look back to the GFC or the pandemic 185 00:09:10,080 --> 00:09:11,680 Speaker 2: has kind of good examples for this. But you know, 186 00:09:11,800 --> 00:09:13,920 Speaker 2: the GFC happened. You know, part of the reason the 187 00:09:13,960 --> 00:09:16,160 Speaker 2: dollar was an appreciation trend. It was a kind of 188 00:09:16,160 --> 00:09:20,360 Speaker 2: a US led financial crisis, but ultimately, because it's the 189 00:09:20,440 --> 00:09:22,959 Speaker 2: world's reserve currency. When you get extreme risk a version, 190 00:09:23,080 --> 00:09:26,240 Speaker 2: what that means is deleveraging, and when you deleverage out 191 00:09:26,240 --> 00:09:29,040 Speaker 2: of financial assets, you're going back to cash. And if 192 00:09:29,040 --> 00:09:31,440 Speaker 2: the world still has the larger share of being reserved, 193 00:09:31,440 --> 00:09:34,080 Speaker 2: it's still the main reserve currency. That means ultimately going 194 00:09:34,120 --> 00:09:35,520 Speaker 2: back to the dollar. It's a little bit of a 195 00:09:35,520 --> 00:09:37,800 Speaker 2: simplified way of looking at it, but it's saying that 196 00:09:37,960 --> 00:09:41,400 Speaker 2: in extreme risk version, the dollar will still be a haven. 197 00:09:41,520 --> 00:09:44,520 Speaker 2: And I expect that the coming years is despite the 198 00:09:44,559 --> 00:09:46,559 Speaker 2: fact that I am bearish the dollar and I think 199 00:09:46,559 --> 00:09:49,679 Speaker 2: that the dollar can depreciate a chunk more. I think 200 00:09:49,720 --> 00:09:53,080 Speaker 2: we'll have bouts of the dollar really rallying on the 201 00:09:53,120 --> 00:09:55,480 Speaker 2: way down due to that kind of risk of version. 202 00:09:55,960 --> 00:09:58,760 Speaker 2: What will drive investors back to the dollar on a 203 00:09:58,880 --> 00:10:05,120 Speaker 2: more structural, sustainable basis, I guess restoring the US edge 204 00:10:05,320 --> 00:10:12,040 Speaker 2: as the preserve of stable and reliable policies and economic 205 00:10:12,040 --> 00:10:16,080 Speaker 2: policy and international policies. And that looks extremely unlikely for 206 00:10:16,120 --> 00:10:18,679 Speaker 2: the next three years. And you know, maybe long term maybe, 207 00:10:18,720 --> 00:10:20,480 Speaker 2: and maybe the damage has now been done for a 208 00:10:20,559 --> 00:10:22,600 Speaker 2: much longer term, but you know, the US is no 209 00:10:22,720 --> 00:10:26,200 Speaker 2: longer the ideal partner of choice that it once was. 210 00:10:26,400 --> 00:10:28,680 Speaker 2: It doesn't mean that it's particularly poor. It had a 211 00:10:28,679 --> 00:10:31,360 Speaker 2: special status before. It's just lost its special status. It's 212 00:10:31,360 --> 00:10:33,839 Speaker 2: now just like everyone else. It's you know, deals come 213 00:10:33,880 --> 00:10:37,040 Speaker 2: and go. So I don't think it restores its special 214 00:10:37,080 --> 00:10:40,960 Speaker 2: status as preferred currency for many years, which is why 215 00:10:41,080 --> 00:10:43,960 Speaker 2: partially why I believe in a multi year dollar down trend, 216 00:10:44,160 --> 00:10:46,800 Speaker 2: even if not some kind of doom mongery prognostication. 217 00:10:47,200 --> 00:10:50,600 Speaker 1: Okay, Mark Kudmore, our Markets Live executive editor, thank you 218 00:10:51,240 --> 00:10:53,960 Speaker 1: For more explanations like this from our team of three 219 00:10:54,040 --> 00:10:57,400 Speaker 1: thousand journalists and analysts around the world. Go to bloomberg 220 00:10:57,440 --> 00:11:02,679 Speaker 1: dot com slash explainers. I'm Stephen Carroll. This is here 221 00:11:02,800 --> 00:11:05,800 Speaker 1: why I'll be back next week with more. Thanks for listening.