Dollar Depreciation Expected Over Long Term Amid Capital Flight

The US dollar is expected to depreciate in the long term due to capital outflows, according to Validus Risk Management. Despite this, the dollar strengthened in the short term. Investors are likely to continue moving funds out of US assets, contributing to the dollar's weakening over the long term.

The U.S. dollar has shown resilience in the short term, despite expectations of long-term depreciation due to capital outflows, according to Validus Risk Management. This apparent contradiction highlights the complex interplay of economic factors influencing currency values.

Short-Term Strength

The dollar's recent strength can be attributed to several factors. First, the Federal Reserve's policy of maintaining high interest rates has made the dollar relatively more attractive to foreign investors. Second, geopolitical uncertainties, such as the ongoing Ukraine conflict, have led to increased demand for safe-haven assets like the dollar. Additionally, the U.S. equity market's high valuations and expectations of continued economic growth have contributed to the dollar's short-term strength.

Long-Term Depreciation

However, several indicators suggest that the dollar is likely to depreciate in the long term. Capital outflows, driven by concerns about U.S. fiscal policy, interest rates, and geopolitical risks, are expected to continue. The U.S. government's large budget deficit and the proposed One Big Beautiful Bill (OBBB) have raised concerns about the sustainability of the U.S. debt. Additionally, the Federal Reserve's expected rate cuts could lead to a decrease in the dollar's attractiveness compared to other currencies.

Impact on Investors

Investors are likely to continue moving funds out of U.S. assets, contributing to the dollar's long-term weakening. The dollar's reserve currency status, though still dominant, has begun to erode. Countries are increasingly seeking alternatives to the dollar for trade transactions and as a store of value. Furthermore, foreign investors' concerns about asset seizures by the U.S. government and potential tax increases on foreign holdings have further dampened demand for the dollar.

Conclusion

The U.S. dollar's short-term strength is a result of a combination of factors, including high interest rates, geopolitical uncertainties, and high equity valuations. However, the long-term outlook for the dollar is one of depreciation, driven by capital outflows, fiscal policy concerns, and the Federal Reserve's expected rate cuts. Investors should be aware of these dynamics and adjust their portfolios accordingly.

References:
[1] https://pekinhardy.com/why-the-u-s-dollar-is-falling-under-trumps-second-term/