The US Dollar not-so-free fall

When talking about international trading and investing everybody has grown accustomed to the same face, the US Dollar. It was at the core of any transaction, it denominated almost all the financial instruments you could think of and it was the shelter everybody looked for when things got ugly (this last one was shared with gold obviously). But this familiar face seems to be aging quickly for a number of reasons and, most importantly, it does not seem to care about it.

This omnipresence of the USD has always been key for the US economy, as it has allowed for the US to issue more and more debt at quite low prices independently of the markets situation. The perceived-risk of the US debt had always been very low (notice the past tense here). The US government of course knew this, and used it on its favor but they have been using the strategy for too long and too hard. As it happens with everything, if you overuse and stress something for long enough, it breaks...

EUR-USD exchange rate. Credit: Yahoo!

 

Beside the US Federal Reserve, a number of factors have also been key in breaking this model. The usual suspects are all there: never-ending low interest rates, excessive debt issuing, lack of confidence in the financial markets (AKA go for gold), the euro strength, the late quantitative easing... All of these have undermined the value of the dollar, with the US Federal Reserve seal of approval. Depreciating the currency is a textbook measure for making your exports more competitive and your already issued debts more bearable, but when you do this with the world's established reserve currency some side effects begin to appear. This depreciation does not come for free.
One of this side effects is quite worrying. As we said before most of the traded financial instruments are nominated in USD, no matter the home currency of the investor buying them. For this 'foreign' investors the dollar plunge can erode all of the earnings (if any) of the investment when the time for currency conversion comes. Of course this is not a desired situation for anyone thus people are losing confidence and interest in the USD, making it fall further.

Another side affect we are all going to regret is the influence the dollar is having in the oil spike of the last week. The extremely unstable situation in the Middle East is what causing a surge in oil price, but the weak USD is making matters even worse.

Last but not least we have inflation. A weak currency has always been fuel for heavy inflation and things do not look to be different this time. Problem is again that the dollar is not a 'normal' currency, but the world's currency as of now. Of every possible international trade you can think of, 42.45% of them are nominated in USD, with the EUR being next but far at 19.56%.

The Federal Reserve moves the dollar up or down depending on its needs, but the free fall they are pushing in the last months is becoming too big and it can backfire by making the dollar lose its reserve currency status as lots of people are suggesting lately. Losing this status would be quite detrimental for the US, as it would take power and financial maneuverability out of their hands, which is the last thing the country needs to continue with its weak economic recovery.

The United States currency depreciation is starting to look worryingly similar to that of the Roman Empire's sestertius before the empire's decline. In the sestertius case this could be clearly seen because the coin's physical silver content decreased through time (from being a fully silver coin to being mostly brass and copper). An actual dollar bill looks the same than one from 5 years ago, this can fool us, but what is a dollar worth today?