U.S. Dollar Strengthens on Hopes of Stimulus Deal, but Reserve Currency Status in Doubt

The US dollar has maintained gains this week, following a dip against other global currencies, on tentative optimism that stimulus talks would break new ground.

This was despite a recent warning from Goldman Sachs that the dollar faced "real concerns" about its longevity as the world's reserve currency and the fact that talks remain gridlocked in Congress.

The greenback slipped against other currencies such as the pound three weeks ago, as confidence in markets and the economy waned amid a resurgence of coronavirus cases, only regaining ground over the weekend.

A strong dollar has some benefits for consumers. In times when travel is commonplace, it generally means that it can buy more of a foreign currency than before, benefitting Americans traveling overseas.

However, when the dollar rises, American companies that export goods or rely on global markets for the bulk of their sales can face a knock. It makes American-made goods more expensive, meaning a reduction in U.S. exports which slows economic growth. It is a delicate balancing act for trade.

In recent months, the decline in the dollar has mirrored the weakness of the U.S. economy as the pandemic has spread.

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The dollar's recent dip has led to questions about whether it is still the world's reserve currency, as the Japanese yen, the euro, the Mexican peso, and the Swedish krona have all risen while the dollar has fallen.

A recent note from Goldman Sachs, cited by Bloomberg, voiced that the dollar might be losing its grip on global markets.

"Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows," it said.

There are now "real concerns around the longevity of the U.S. dollar as a reserve currency."

Events helping support the dollar and wider economy have included progress on coronavirus aid bills. On Monday, Congressional leaders and the Trump administration said they were ready to resume negotiations.

Nancy Pelosi
U.S. Speaker of the House Rep. Nancy Pelosi (D-CA) and Senate Minority Leader Sen. Chuck Schumer (D-NY) participate in a news conference August 7, 2020 on Capitol Hill in Washington, DC. Negotiations between Treasury Secretary Steven Mnuchin, Speaker of the House Rep. Nancy Pelosi, Senate Minority Leader Sen. Chuck Schumer and White House Chief of Staff Mark Meadows for an agreement on how to move forward on a new relief package to help people and businesses weather the COVID-19 pandemic continue at the U.S. Capitol. Alex Wong/Getty Images

Days of meetings between White House officials, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer failed to turn out an agreement and the two sides remain divided on a number of issues, including unemployment benefits.

One aspect of the deal not causing tension between the two sides is stimulus checks as negotiators agreed on a second round. This buoyed markets.

A second round of checks would likely resemble the payments that were sent out under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, according to Treasury Secretary Steve Mnuchin.

The ongoing spat with China is also a consideration in relation to confidence in the U.S. foreign exchange rates.

China has imposed sanctions on 11 U.S. citizens including lawmakers, in a tit-for-tat backlash from actions taken by the U.S. to sanction officials from Hong Kong and China.

Threats have also been made against Chinese companies that they could be delisted from U.S. stock exchanges if they fail to comply with accounting standards.

Despite a so-far muted response to this in global markets, analysts say these moves will have longer-term implications on currencies.

The coronavirus has knocked many market forces off-kilter, and investors will have to decide whether they believe in the longevity of the dollar while its value fluctuates.

U.S. Dollar Strengthens on Hopes of Stimulus Deal, but Reserve Currency Status in Doubt | Business