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Decline of US dollars in 2021

Decline of US dollars

Decline of US dollars refers to when the value of one US dollar is lower as compared to other currencies in foreign exchange market. The future of the US dollar is expected to be on a weak link. The US dollar index (DXY) has dropped close to 89.50 in the year 2020 as it costs about $1.2300 to purchase one euro; it costs more than $1.3600 to acquire one pound; one dollar can buy about 6.5225 Chinese Yuan. 

In 2018, president Donald Trump was trying to turn the US trade balance around and therefore he wanted a weak US dollar to speed up the US exports. This is the point where the US dollar started facing its decline and in 2020, with the global pandemic, the situation became worse. 

A declining US dollar may also mean a fall in the value of treasuries of the US and you can take a piece of declining market and buy in dips via Tickmill

Causes for decline of US dollar

In the year 2010, Foreign Account Tax Compliance Act required all foreign banks and other financial institutions to disclose the information about income and assets owned by various US customers. Its main aim was to exit the wealthy taxpayers who hide their assets offshore in order to steal the taxes. Due to this compliance, many investors were worried that they would be dropped out from US banks and hence they moved away from dollar denominated investments which ultimately declined the value of the US dollar in foreign exchange market.

Other than this, another competitor of the US dollar is Chinese yuan. China has been trying hard to replace the US dollar with its currency yuan as the world’s reserve currency since 2013. It has a very high impact on the value of the US dollar.

Effects of declining US dollar

A weak US dollar buys less foreign goods. This increases the prices of imported goods leading to inflation in the home country. With the weakening of the dollar, investors with dollar dominated holdings sell their investments. On the other side, exporters can grow their business in times of declining US dollars as their goods seem cheap to other importers and this can boost economic growth attracting more foreign investors in US stocks. 

Steps that can be taken to protect you from the effects declining of US dollars

  1. Earning potential can be increased through education and training. If your earnings are increased each year, you can outpace the dollar decline.
  2. You can invest part of your portfolio in the stock market. It can be risky, but the risk-adjusted returns can be beneficial for your economic status.
  3. Purchase Treasury Inflation Protected Securities and Series I Bonds from the U.S. Department of the Treasury to protect yourself from inflation.
  4. You can purchase euros, yen, or other currencies, which will increase in value if the dollar loses its power. You can either purchase them outright at a bank or buy an exchange-traded fund that tracks their values.
  5. Keep your assets liquid, so you can buy and sell as needed. You should have as little as possible in real estate, gold bullion, or other difficult-to-sell goods. 
  6. You should have a well-diversified portfolio to rebalance your asset allocation if it looks like the business cycle is going to shift. 
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