Four possible causes of a decline in the appeal of the US dollar – Natixis

The US dollar is the dominant international reserve currency, which gives the United States the privilege of issuing a reserve currency. But could the appeal of the dollar decline sharply, which would create a serious problem in financing the US? Such a decline in the appeal of the dollar could have several causes, economists at Natixis report.

The risk of a loss of the fiscal and external solvency of the US

“The US is characterised by twin deficits: fiscal deficit and external deficit. Investors may therefore be concerned about a parallel trend of loss of fiscal solvency and loss of external solvency. This concern appeared already from 2002 to 2008 and caused a sharp decline in the dollar’s exchange rate.”

A structural deterioration in the situation of the US economy

“In particular in the US, there has been a decline in productivity gains and in the participation rate, which we calculate in the same way in the US and the eurozone, and which may result from low skills, leading to the prospect of a marked decline in potential growth. Moreover, a policy of reducing dominant positions in the US would have the effect of pushing down share prices and reducing the attractiveness of the US for equity investors.”

The decline in the diplomatic and military role of the US

“Especially after the withdrawal from Afghanistan, and the US’ refusal now to intervene in other countries' organisation and political choices as long as they are not a threat to the US.”

The greater credibility of the euro

“The development of more cooperative policies between eurozone countries may result in Europeans’ savings financing investments in the eurozone instead of being lent to the rest of the world, particularly to the US.”