Love and Hate with the Dollar - Just a Fad

There is political cost with being a reserve currency - Investors love to hate on you and look for a fall. When you are on top, everyone is looking for a fall because you cannot go any higher.  The dollar has gone through some rough patches but still has shown the ability to bounce back from negative stories.

An interesting story that has been given a lot of attention is dollar hatred expressed in Money: Inside and Out by Jens Nordvig in "A Brief History of Dollar Hatred". Nordvig makes the point that we have gone through several dollar hatred periods since 2000. During these periods of dollar hate, there is a strong narrative for why the dollar should decline only to see the dollar bounce back. I agree with the fact that we have gone through periods of dollar negativity but the reality, the dollar has shown resilience and moved beyond the hatred associated with a given time or story. 

The dollar hatred periods can be broken into three themes:

• 2004-08 - the great current account scare - The period when economists focused on the large US current account deficits which could only be solved through a dollar decline. 
• 2009-13 - The QE infinity story - Excessive monetary policy will lead to a dollar fall and the currency is debased from too much money in the financial system. Other central banks increased their money so on a relative basis the dollar was not debased as expected.
• 2021-present - Dedollarization by major countries who do not want to be hurt by potential sanctions. The dollar hatred is associated with US sanction hegemony.

The dollar has risen and fallen with changes in the macro environment. That should not be surprising. However, disequilibrium in the international finance environment will be solved through several channels. The price of the dollar is just one of those channels. 

In the case of the current account deficit, the rebirth of oil industry changed the current account environment. The QE infinity story was offset by higher growth in the US and the impact of QE in other countries. The dedollarization story is still playing out, but the limited convertibility of currencies for countries who want out of the dollar system is a major sticking point.

There is dollar hatred and there are issues which will drive the dollar lower, but dollar hatred cannot be looked at in isolation. The dollar has strengthened at key times because it is a place of safety. The GFC saw dollar gains. The pandemic saw flight to the dollar. EU problems after the GFC again made the dollar attractive. 

A negative narrative is just a story until there is a major price correction that is not being offset by other policies or price action.