The dollar is destined for the ash heap of history.
Dollar bears insist that its days as the world’s primary reserve currency are numbered.
It’s reserve currencies like the dollar that facilitate international trade. The dollar replaced the British pound as the currency of choice after World War II.
Now, bears say that the official currency of the U.S. is on track for irrelevance.
But this is nothing new. Investors heard this story for years.
Back in the 1980s, the Japanese yen was in the wings. In recent years, the Chinese renminbi was the obvious successor.
In the last few weeks, something unexpected happened: The euro became the frontrunner to replace the dollar.
How the Euro Finally Caught up to the Dollar
As you can see in the chart below, the euro began soaring near the end of April this year. The dollar dropped more than 8% against the euro:
The Euro vs. the U.S. Dollar
The euro’s rally started as France and Germany worked on a €500 billion EU recovery fund. This fund offers grants to European Union (EU) members hit hardest by the coronavirus pandemic.
The EU plans to borrow money to finance the fund. This is the first time it is borrowing funds. In the past, individual nations borrowed and repaid their own debt.
This is also the first time the EU will offer grants to members. In the past, nations borrowed on their own.
French President Emmanuel Macron explained: “That’s a real change in philosophy. I believe this is a very deep transformation, and that’s what the European Union and the single market needed to remain coherent. It’s what the euro zone needs to remain united.”
This deal really transforms the EU. But more importantly, it makes the euro a potential dollar replacement.
Now, one reason that the dollar is the primary reserve currency is because it’s easy to hold. Central banks buy Treasury bonds with their dollars. With more than $21 trillion in Treasury bonds outstanding, there’s an almost unlimited supply of dollars available for central banks.
No other currency is backed by that many bonds.
With the recovery fund, however, the EU joins the debt market. Compared to the Treasury market, the initial issue is small. But in time, EU debt will grow.
As that happens, central banks can hold EU debt. This will pressure the dollar even more. It appears that the dollar is finally doomed.
Bad for the Dollar, Good for Stocks
What many fail to realize is that all this is actually good news for stock market investors in the U.S.
You see, history shows that large declines in a currency are bullish for stocks.
Research reveals that steep drops in currencies are generally buying opportunities.
In fact, local investors in those markets earned more than 48% on average in the year after the currency drop.
And because currencies tend to continue dropping, foreign investors earn about half as much as local investors.
Now that the dollar is dropping in this case, U.S. investors stand to profit the most.
Here at Smart Profits Daily, my colleagues and I are targeting some of the smartest profit-taking opportunities of the Great American Reset.
As we approach bullish waves ahead, I want to remind you that now is the time to stay informed and get ahead of the curve. So, watch for our investment insights daily. You won’t find them anywhere else.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader