Aggregate employment trends also say little about the ability of U.S....
2021-02-11 2 ENGLISH REPORTS
Naturally, this backdrop has led observers to conclude that a dollar crash is imminent, as government debt expands and the balance of payments deteriorates in kind. Over the short to medium term, such a crash is unlikely. Rather, the currency is likely to face a steady but prolonged period of depreciation as the structural supports that have boosted the dollar begin to fade. Broadly speaking, the most recent upcycle has been buoyed by three pillars. First, the shale revolution allowed the United States to achieve energy self-suffciency in 2019. Mechanically, this generated a major improvement in the trade balance and led to a shortage of dollars abroad. However, the world is on the cusp of another energy revolution, a green one. Here, the leadership role of the United States is less clear, as Europe and China possess many of the key technologies.
As these technologies are adopted over time, this will erode the relative energy advantage of the United States. Second, U.S. growth outperformance following the global fnancial crisis allowed the Fed to normalize monetary policy as many other developed-market central banks remained stuck at the zero lower bound. Prior to Covid-19, this opened up wide interest rate differentials that encouraged U.S. infows. However, these interest rate differentials have now contracted substantially. And with the Fed likely on hold for many years, they are unlikely to widen again soon. The fnal factor boosting the dollar has been President Trump. While it is debatable whether his policies were good for the U.S. economy as a whole, they were undoubtedly good for the currency. In particular, the corporate tax rate was reduced from 35 percent to 21 percent, and there was a dramatic rollback of government regulations. Combined, this raised the after-tax return on capital and made the United States a very attractive place to invest.
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