Currency

America's "Superman Currency" is weakening — how that affects your wallet

Friday, August 21, 2020 by Robinhood Snacks | Disclosures

Depreciation is his kryptonite

Nutella might get pricier... The value of the US dollar is sliding (aka depreciating) relative to other currencies like the Euro. Say a jar of Nutella costs €1. A year ago, €1 equaled $1.10. Today, €1 = $1.19. You're spending 9 cents more to nab the same jar of Italian decadence. The value of the dollar has fallen to its lowest level in over two years, and it might keep sliding.

  • "Superman Currency": The USD's stable rep makes it a hot global commodity. It has long been used as the world's reserve currency for international purchases.
  • Superman in Action: If Canada wants to buy oil from Mexico, it's likely doing it in USD. Exchanging Canadian dollars for Mexican pesos could mean losing money. Picture gnarly airport exchange fees post-Cabo trip.

Beware the kryptonite... Like that friend who immediately Venmos you, the US government has never missed a debt payment. That has allowed it to borrow trillions at near-zero interest rates (shoutout US Treasury bonds). But depreciation threatens the dollar's Superman status. Some reasons why it's happening:

  • Fed money printer: The Fed has been blasting out dollars to inject back into the economy. More dollars = less demand for dollars = less valuable dollars.
  • Instability: An out-of-control pandemic, shrinking GDP, and political instability have affected confidence in the dollar. Oh, and the national debt is at a massive $27T.
THE TAKEAWAY

Every dollar has two sides... If the US was a store, it would have a "discount" sign out front. Depreciation makes American goods cheaper for foreigners. That drives up demand for American products and stocks, which drives up stock market prices. If the dollar weakens long-term though, that could mean higher inflation, higher interest rates, higher taxes, and less global power for the US. China wouldn't mind snagging the dollar's Superman cape.