The U.S. dollar is down relative to other currencies to its lowest level in four years.
Frankly, this is an unusual position for the dollar to be in! The dollar has been relatively strong overall against most other currencies for decades now. In fact, a “strong dollar policy” has been the official position of the U.S. Treasury for the last 50 years.
And if you’re thinking, So what? I’d ask you to just stay with me for a few minutes.
The weakening dollar might be more important to you and your savings than you think.
First, let’s talk about…
What’s happening with the dollar?
Omkar Godbole with CoinDesk gives us some details from institutional, big-money managers:
[Bank of America’s] February survey shows investor positioning in the U.S. dollar has fallen to its most negative (bearish) level since at least early 2012, with net exposure at a record underweight.
Let me translate that into English for you. First, “investor positioning” refers to investments for or against an asset.
Second, “most negative level since…” refers to professional money managers’ outlook. They expect further declines in the dollar.
Finally, “record underweight” refers to the percentage of overall holdings.
Taken all together: Institutional investors are getting out of dollar-based assets at record levels because they expect continued dollar declines. “Continued” in the sense that the dollar index declined over 9% last year (and nearly 2% so far this year).
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Why? The survey indicated concerns over the weakening U.S. labor market, and the possibility of the Federal Reserve cutting interest rates further.
It’s important to note that currency values are measured relative to other currencies. They fluctuate all the time. But the dollar has been consistently dominant on the world currency market for decades.
A weak dollar is an unusual position for it to be in, and a weakened dollar has effects that you may not have expected.
The first thing to realize is who is driving the dollar lower. An article at European Business Magazine notes that this trend isn’t being driven by speculators or hedge funds. On the contrary:
The selling is being driven by so-called real money investors – pension funds, sovereign wealth funds, and long-term institutional allocators – who are either hedging against further dollar weakness or actively reducing their exposure to dollar-denominated assets.
These aren’t day-traders or speculators playing around in markets. The “real money investors” are long-term thinkers and planners. Strategists who obsess over their allocations (as you should be, too). It’s not a game to them. They do this professionally.
So, if serious investors are shying away from the dollar, the obvious question is…
Where are those investors going?
Some foreign currencies, such as the euro, the pound, and the Swiss franc, have strengthened against the dollar.
But it isn’t just other currencies that those investments are moving towards. The European Business Magazine article notes,
Gold has been a primary recipient of defensive flows, trading near record highs as investors seek insulation from currency debasement and geopolitical risk.
Even if you’re not looking to diversify into gold (and if you are, our sister company, Birch Gold, can answer questions for you and help you with that process), it’s important to understand why gold is seeing renewed interest from serious investors: When the dollar weakens, investors look for scarce asset benefits. In other words, they’re looking for something that a government can’t debase at will… which is a major problem and danger of holding currencies (and some other assets).
Gold is a defensive asset. Investors don’t look to gold for growth; they buy gold for protection against loss.
Obviously, gold is just one of “scarce assets.”
Why a bearish dollar may be good for crypto
Bitcoin, by design, is a scarce asset, too. Governments (or crypto miners) can’t generate limitless new bitcoins out of thin air, and this helps to protect the asset class from manipulation. Note that not all cryptocurrencies are created equal here. Bitcoin has a fixed total quantity. Other cryptos like ether can be either inflationary or deflationary, depending on their programming.
(As a side note, I’m focusing on cryptocurrencies for serious, long-term investment, not for entertainment or speculation which you often see in gimmicky memecoins, for example.)
Now: Institutional, “real money” investors are bearish on the dollar based on both its recent performance (bad) and their concerns about its future, too. There have been major concerns about the institutional independence of the Federal reserve recently. The President and the Secretary of the Treasury have both been participating in a public-relations battle with the Fed, arguing that lower interest rates are necessary to help the federal government manage its $38.4 trillion debt (especially the multi-trillions in refinancing the Treasury engages in annually).
Now, the Fed is set up as a fully independent agency, insulated from political pressure. They’re supposed to control inflation (“stable prices”) while maintaining “maximum sustainable employment,” a combination that should lead to economic growth for the overall economy. Let’s be honest, though: The Federal Reserve has always come under political pressure! Most notoriously, when President Nixon bullied Fed chair Arthur Burns into lowering rates to help Nixon’s reelection campaign. Burns caved, kept rates lower than they should’ve been and the U.S. suffered through a “lost decade” of stagflation…
Crypto, of course, is by its very nature independent of institutional control. “Decentralized” is the opposite of “centralized” (like a “central bank”).
That’s one of the biggest reasons that governments worldwide fought against crypto: They can’t control it. They can’t debase it, or prevent you from using your capital how you choose (whether they like it or not). In fact, the whole reason Bitcoin was invented (according to the whitepaper) was to offer the public an alternative to centrally-managed money.
That independence is a big appeal for many investors who care more about their savings than what politicians or bureaucrats would prefer. I mean, there’s a reason that our Social Security withholdings are “invested” in U.S. government debt… Not to preserve our wealth so much, in my opinion, as to fund additional spending.
The cherry on top
To add an extra bit of appeal to cryptocurrencies for many people, retail investors can choose to diversify for long-term investing into crypto in tax-advantaged ways. This means that you can not only get the benefits of scarcity and independence with crypto, but you may be able to reduce your tax liability, too. If you’d like to find out more about this tax-advantaged method, get our free Essential Guide to Digital IRAs. If you’ve already done your due diligence and decided that diversification with crypto is right for you, you can open a Digital IRA with BitIRA anytime, day or night, in less than 10 minutes.
