Why USD is on downtrend in 2021?
Why USD is on downtrend in 2021?

Following an interesting question of one BullsInvest member, I wanted to clarify why the value of the US Dollar (USD - $) has been on a downtrend for months and why it keeps dropping.

First of all, the value of any currency, as of everything else, depends on its supply and demand. Therefore, when, for instance, the demand for a currency increases, its value increases as well. Similarly, when the supply of a given currency increases, its value drops. There is more of it in circulation, hence it's worth less. This is basic economics.

The way that money supply is measured within an economy is by aggregating the amount of cash in circulation (notes and coins) plus the deposits with banks and other institutions. This total money supply measure is called M3.

The currency with the most money in circulation is clearly the USD because the USA is the world largest economy, and its currency is the most widely used and popular one

During 2020, most of the major central banks began huge Quantitative Easing (QE) programmes, which effectively means creating more money and injecting it into the economy. The extent to which QE has been used this year by certain central banks has never been seen before, not even during the notorious Global Financial Crisis in 2007/2008. These infinite liquidity injections artificially pushed the stock market to its all-time high on multiple occasions during 2020 and, as we know, totally distorted companies valuations. Stocks, Bonds, Gold and Crypto are all in an apparent bull market, which in normal times would be pure utopia.

However, while the value of our investments may be going up, the profits in our home currencies (for those liming outside the USA) haven't been following the same trend. This is due to the fact that the money supply of USD has increased on a much larger scale than that of EUR, KPY or GBP. For instance, the M3 value of USD went from 15.5 trillion in February 2020 to as much as 18.8 trillion in October 2020. An increase of money supply of over 21%! On the contrary, in the same period, the increase of supply of Euros, for instance, was just above 8%. This inevitably caused the USD to devaluate against most of the major currencies as no central bank has printed as much money in 2020 as the FED.

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Nathan George

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