As the US Federal Reserve cuts rates to 1%, the rate differential between the dollar and those three major currencies shrinks, and ultimately falls below those other currencies at some point this year.
That's the path to the dollar declining more this year.
Now granted, I understand all of that sounds like a big, fat economic "so what?!"
We all earn dollars and spend dollars, so who cares if some investor in Timbuktu sells dollars to buy euros?
Well, we care. The impacts hit every American household.
The dollar losing value means:
1. Inflation is marginally higher.
America imports lots of goods—raw and finished—by necessity. Uncle Sam can't grow bananas, coffee, and cocoa, for instance. He must import those. As the dollar weakens, the price of imported goods rises.
2. Weakening demand for US debt.
If the Japanese yen yields 1.5% vs. the dollar yielding 1%, then I, as the dude running investments for a Japanese bank or insurance company, want to own yen-based debt rather than dollars. The portfolio earns more money.
So, I sell off US debt to buy Japanese debt. And I stop attending US debt auctions because why buy low-yielding debt of a nation facing extreme-debt woes?
That flows through the US economy. The Treasury Department must pay higher interest rates to sell all the debt Uncle Sam must sell. That drives up debt-repayment costs when America is already spending more than 15% of the budget on interest.
The government must borrow more and more money just to make interest payments.
At some point, that morphs into a malevolent debt spiral.
3. The dollar's role in global finance shrinks.
China is now conducting more trade in its own currency than in dollars. That reduces dollar demand globally.
Additionally, central banks are reducing dollar exposure, too. The greenback now represents about 48% of central bank reserves, down from 60% in the 2010s. Moreover, central bankers now rank the dollar #7 on the list of assets to own.
Gold is #1.
Central banks will continue selling dollars to buy gold, exacerbating the dollar's down trend.
So, how do you protect your wealth and your financial lifestyle?
You really want some of your wealth out of the US dollar. At the very least, have a Plan B in place to get your money out of dollars if a social, political, or financial crisis lands in America.
Reduce your dollar exposure by owning gold and Swiss francs, the best managed currency in the world. Both will rise in value as the dollar declines.
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