Is the US dollar going to collapse?

Thu, 28 Mar Pre-Open

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The United States, a once prosperous country which was praised all around the globe as being the land of opportunities is now saddled with an ever increasing debt. After the sub-prime mortgage crisis, which hit not just the US but the whole world, the Federal Reserve chose to cut interest rates several times to a historic low of 0.25%. Further, the Fed continued to enforce its loosening monetary policy by announcing various rounds of quantitative easing, the latest known as QE3 or QE open-ended, buying mortgage-backed securities to the tune of US$ 40 bn a month and keeping interest rates low in order to encourage consumer spending.

This has led to the increase in the value of the dollar. The Dollar Index, which measures the greenback against six other currencies, has gained 3.3% in the past year, and the same amount so far this year. Budget busting government spending, trillions in Treasury debt and the lowest interest rates on record have many worried about inflation and the damage it could inflict on the dollar once the global economy recovers.

The Federal Reserve and Treasury have flooded the world with greenbacks. Because the dollar is a reserve currency and because US Treasury debt has virtually no default risk, investors have sucked up as many dollars as the US has been willing to provide. But that's sidelined money. Eventually international investors are going to want to sell dollars and buy performing assets.

There are grave consequences if the dollar collapsed. The dollar collapse would create a global economic crisis since investors will immediately start rushing to other currencies or assets, like gold or silver. The dollar collapse will create skyrocketing import prices in the US that will lead to inflation and possibly hyper-inflation. Because of risks, much debate has occurred in recent times whether the greenback deserves its status as the world's reserve currency. Because of the kind of problems that the US is facing and the reckless money printing done by the Fed, dollar is losing value. The question is which currency will replace it? Its counterpart Euro has too many problems of its own to emerge as a serious contender. The same can be said for currencies from the emerging countries. Hence only time will tell whether a dollar collapse is imminent or not.