The COVID-19 pandemic has had lasting effects on the global economy, and the United States has not been immune to these challengesWith the recurrence of the virus and bolstered case numbers, the federal government alongside the Federal Reserve has resorted to significant monetary measuresThis has led to a concern among leading financial institutions and economists regarding the future of the U.Sdollar as the global reserve currencyPredictions are surfacing that a significant devaluation of the dollar may be on the horizon.

Notable economists, including former Morgan Stanley Asia Chairman Stephen Roach, have raised flagsRoach has expressed that the unprecedented monetary expansion in response to the pandemic will hasten the end of the dollar’s excessive privileges and could lead to a 35% devaluation within the next two to three yearsMeanwhile, Japan's conservative Nomura Securities shares a similar outlook, estimating a 20% drop in dollar value over the next five years, influenced by rising U.S

debt, economic expansion, and the strengthening euro.

Even Goldman Sachs, a prominent American financial institution, has forecast a 5.3% devaluation of the dollar in the upcoming yearThis suggests that concerns are not confined to international observers; they resonate within U.Sborders as wellThe dollar index, which reflects the greenback’s strength against a basket of other currencies, shows a decline of about 9% since the Federal Reserve’s aggressive quantitative easing began on March 25, further hinting at the trend that the dollar is losing value in relative terms.

There are two primary factors driving this potential devaluationFirstly, the scale of money printing by the U.Sis unlike anything seen beforeSince the onset of the pandemic, the U.Shas injected an estimated $3.71 trillion in base money into the economyWhen factoring in commercial bank derivatives and financial leverage, the total pumped into the market could be as high as $10 trillion, almost equal to the total amount of dollar reserves held globally

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Despite this immense influx of dollars, demand for goods, services, and investments remains tepid, causing a decline in the purchasing power of the dollar vis-à-vis other stable currencies like the euro, yuan, and yen.

A second, more critical aspect is the impending negative savings rate in the U.SSavings is the foundation of any nation’s capital; it is crucial for economic developmentAs the pandemic struck, America's national savings rate had already plummeted to 1.4%. In its wake, both household and corporate incomes fell rapidly, completely depleting available savingsConcurrently, the federal government has pushed the fiscal deficit to an unprecedented 14%, the highest in historyThis scenario paints a grim picture: if households and businesses lack funds, and the government itself is in debt, it is inevitable that the net savings rate in America will descend into negative territory, potentially falling to between -5% to -10% in the next two to three years.

This drastic shift draws parallels to the 2008 financial crisis, where the net savings rate dropped to merely -1.8%. With savings in the negative, domestic investments would rely heavily on foreign financing

The quickest way to attract global capital in a pandemic-stricken economy may be to expedite dollar depreciationIf foreign currencies like the euro, yuan, and yen increase in dollar-value returns, it could incentivize foreign investment into high-tech and high-end manufacturing American stocks.

However, this double-edged sword raises questions about America's willingness to allow foreign investors to dominate significant portions of its technological and manufacturing sectorsFurthermore, countries that typically see the dollar strictly as a trading currency could grow increasingly wary, particularly as their dollar-denominated reserves lose substantial valueSuch a shake-up could undermine global faith in the concept of the dollar as the centerpiece of global finance.

Nevertheless, will this devaluation ultimately lead to the downfall of the dollar’s supremacy as the world’s primary currency? In the immediate future, it appears unlikely

The reality remains that there is currently no true substitute for the dollarThe costs associated with adopting any other global currency—such as those regarding savings, settlements, payments, investment underwriting, and the size and number of countries using the currency—are highTo effectively reduce the transaction costs of a different currency would necessitate a massive investment into banking infrastructure, legal systems, and the cultural practices essential for its operationThese are not established overnight, which continues to grant dollar supremacy for the time being.

However, the tides are shiftingThe increasing depreciation of the dollar is prompting some nations to diversify their foreign reserves, moving away from a heavy reliance on U.ScurrencyTwo decades ago, the dollar accounted for over 70% of global foreign exchange reserves, but by 2020 this proportion had fallen below 60%. Given the scale of the economic fallout from the pandemic, it is predicted that dollar holdings as a share of global reserves will continue to dwindle.

Once the dollar’s share dips below 50%, or even 30%, the very foundation of dollar hegemony will begin to erode