Europe is dollar-ising. Dollar risk is piling up.
Summary:
The Euro and Pound are plummeting in value.
With apps like Revolut and Wise, consumers have easy access to dollars.
Europe and the UK are somewhat buffering inflation in the US.
The US dollar is seen as a safe haven, but the reality is that risk is piling up.
The Euro and the Pound
Here are the charts vs the dollar, with the Euro having dropped 18% and the pound dropped 21% versus the US dollar over the past year:
Dollarisation of Europe (and beyond)
As I’ve argued before, it’s really easy to hold dollars instead of Euro or Pounds. This is true because of technology and apps like Revolut and Wise. At a smaller scale, crypto stablecoins like USDC (US dollar coin) also make it easy to hold dollars outside of the US.
So, a lot of people outside the US – seeing their currency getting weaker versus the dollar will hold increasing amounts of dollars. I pretty much hold all of my cash as dollars, and the conversion happens automatically when I make purchases. However, I don’t think currency markets are easily predictable – particularly in the short term. So, I’m also trying not to hold too much cash, because I don’t don’t think this dollar strength is necessarily stable in the medium to long term.
The strong dollar is buffering US currency and inflation
Inflation is worse right now in the the EU and UK than in the US, so people are buying dollars to protect against currency devaluation.
If lots of people outside the US are buying dollars, that increases demand for dollars and the price of dollars.
For people in the US, this makes imports cheaper, so it tends towards reducing (or, more accurately, offsetting) inflation.
Risk is piling up in the US dollar
In markets this past week, we can see how worries about lower taxes (and hence a higher government deficit) are causing concern about the British pound. It’s a reminder that markets can care about government deficits.
Right now, markets don’t seem to care much about the US deficit, but everyone is piling into dollars. So, the US dollar is getting stronger and riskier.
US dollar, then rekt.
I don’t think it is guaranteed that the US dollar is in trouble – especially near-term. However, I think the risks are under-appreciated.