Market Commentary

The Dollar – a strong dollar as it is the reserve currency of the world

Strong Dollar

Steve Mnuchin the Treasury Secretary said he is supportive of a strong dollar as it is the reserve currency of the world. It is the goal of the Trump administration to keep it that way. Of course, they would say that but at the same time, the actions of the government and the Federal Reserve may cause the dollar to weaken.

First, U.S. dollars are traded against other currencies and its strength is based on the economy and the number of dollars in the system. To have a strong dollar you need a strong economy and controlled inflation. A weak dollar will ensue if the economy is weak or if the central bank prints far more dollars then is needed flooding the system thus causing inflation. Inflation lowers the value of the dollar.

With all the debt being incurred because of the Covid-19 virus as the government prints trillions of dollars, to fight the economic fallout, inflation is the most likely result. Add to that the FED chairman’s suggesting he is going to loosen the bonds of inflation above their 2% target the dollar is likely to weaken.

So does the Trump administration, or any other presidential administration, really want a strong dollar when, at some point, we have to pay the debt we are incurring? Wouldn’t it be desirable to have a weak dollar to pay that debt with less valuable future dollars?