8 BARRON’S October 12, 2020
exchange and store of value, in the famous
description by Valéry Giscard d’Estaing
when he was France’s finance minister.
The latest such jeremiad comes from Stephen
Roach, the former chief economist at Morgan
Stanley, who writes in a Financial Times op-ed
that a crash in the dollar lies ahead. The explo-
sion in the federal budget deficit—to an estimated
16% of U.S. gross domestic product in 2020 and a
still- huge 8.6% in 2021, as a result of fiscal relief
to offset the income and job losses resulting from
the coronavirus pandemic—means having to
attract global capital to fund the gap.
BCA Research similarly points out in a
client note that the U.S. trade deficit has
surged to its highest level since 2006, and
would be the widest ever were it not for U.S.
energy production. Demand for American
exports has stagnated, while import de-
mand has been boosted by the $2.3 trillion
Cares Act. Failure to provide further fiscal
support for the economy would narrow the
trade gap, but at the cost of depressing the
domestic and global economies.
Roach and BCA agree that the outlook
is bearish for the greenback. They both see
U.S. “dissaving” worsening. The household
savings rate is seen falling after spiking as
a result of the Cares Act’s transfer pay-
ments, while the fiscal deficit remains un-
precedentedly huge. At the same time, the
Federal Reserve has committed to keeping
its short-term interest-rate target near zero
until inflation rises to 2% and stays above
its target, which the central bank’s officials
guess won’t be before 2023.
With interest rates pinned to the floor,
the only other instrument to adjust the
payments gap is the dollar’s exchange rate,
BCA and Roach agree. BCA calls the U.S.
dollar’s outlook extremely bearish, while
Roach predicts a “crash” of as much as
35% by the end of 2021. The sharply over-
valued dollar could lose its special privi-
lege, as foreign holders increasingly move
to alternatives, he argues.
The euro could gain from the establish-
ment of a pan-European fiscal policy re-
sulting from the €750 billion ($858 billion)
Next Generation EU fund, Roach adds.
The Chinese yuan, along with the gold and
cryptocurrencies touted on TV, also could
gain at the dollar’s expense.
This is a familiar argument of dollar
bears. But currencies typically are ex-
pressed as a pair, usually relative to the
dollar. Comedian Henny Youngman was
asked, “How’s your wife?” His reply:
“Compared to what?”
Thus, those who bet on a dollar decline
also are looking for a rise in the euro, from
a recent $1.1774 or so to a $1.20 range or
higher. The negative interest rates imposed
by the European Central Bank implicitly
are a penalty for holding euros. If a rise in
the common currency weighs on the euro-
zone economy, the ECB presumably could
push its interest rates further into subzero
territory. The continued fall in European
government bond yields also is a reflection
of a weaker recovery on the continent,
while Covid cases are back on the rise in
some Old World countries.
Chinese monetary authorities have per-
mitted a strengthening of the yuan,
through 6.7 to the dollar from over seven
earlier this year. Beijing also would likely
curb its currency’s appreciation if it were
to crimp the Chinese economy’s growth.
But these analyses don’t take into ac-
count a unique advantage for the dollar:
the world-beating U.S. stock market.
That insight comes from Deutsche
Bank global strategist Alan Ruskin, who
cites the attraction of U.S. equities in a re-
search report. The Fed’s monetary expan-
sion has boosted the value of gold, as has
the growth of the U.S. money supply. At the
same time, he points out, the S&P 500’s
total returns have more closely matched the
volatility characteristics of gold, which have
been quite different from those of risk-free
instruments, such as short-term Treasury
securities, the traditional mainstay of dollar
holders such as foreign central banks.
A few monetary authorities, such as the
Swiss central bank and the Norwegian
pension fund, actively invest in U.S. stocks,
Ruskin notes. Central-bank investment in
equities is appropriate in a zero-interest-
rate world, “where asset allocation, like the
old 60/40 stock-bond rule, [is] demanding
a rethink for all investors,” he adds. Stocks
should be thought of increasingly as a nat-
ural hedge against the inflation from cen-
tral-bank balance-sheet expansion, which
would add to dollar assets’ attractions of
liquidity, transparency, and corporate
name recognition, Ruskin contends.
The U.S. payments gap arising from
Americans’ willingness to borrow and
spend has been covered, in large part, by
the rest of the world’s willingness to invest
in safe, liquid instruments, such as Trea-
sury and corporate debt securities. But
greenbacks areneeded to participate in the
FAANGs and other U.S. stocks. While the
path of the U.S. currency is clearly lower,
which isn’t such a bad thing for the domes-
tic economy, the global attraction of Amer-
ica’s stock market could stave off the long-
predicted demise of the dollar.B
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Up & Down Wall Street (continued)
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