At the height of the pandemic recession, a June 22, 2020, headline in The Capitalist.com caught my eye: “Dollar Will Plunge 35%, Lose Status As World Reserve Currency.” The article opened with, “The US dollar is on the verge of a 35% collapse. It could also lose its status as the world’s reserve currency.” This was quoting Stephen Roach, a senior fellow at Yale University and the former chairman of Morgan Stanley Asia.
Roach made similar statements in other published remarks during 2020. In an interview with MarketWatch.com on June 23, 2020, he warned that the decline of the U.S. dollar could happen at ”warp speed” and “sooner rather than later” in the era of coronavirus.
Given his tenure at Yale and Morgan Stanley, Roach is no slouch when it comes to credentials and credibility. His comments caused some investors to react with fear and bail out of their dollar denominated investments.
And as it turned out, he was wrong.
When he made his dire warnings on June 22, 2020, one euro was worth $1.13. A 35% fall in the value of the US dollar would have seen one euro worth $1.53. Exactly three years later the euro was worth $1.10. Instead of Roach’s predicted loss of 35%, the dollar was actually worth 2.65% more.
Similarly, one British pound was worth $1.25 on June 22, 2020, and three years later was worth $1.28, meaning the dollar lost 2.3% against the pound, not the predicted 35%.
Investors that reacted with fear to Roach’s dire warning of “a very near-term … epic downturn” and took positions favoring a dollar decline ended up at best with a nothing burger and at worst with significant losses.
To Roach’s credit, unlike many who make bad predictions, he acknowledged his massive miss two years later in a June 27, 2022, article in Project Syndicate. He wrote, “I should have listened to Alan Greenspan …” and asked, “How did I get it so wrong?”
In a July 7, 2023, column in The New York Times, “Wonking Out: De-Dollarization Debunked,” economist Paul Krugman provides a possible answer to that question. He discusses the unique position of the US dollar as the primary currency for global transactions. He suggests that the dollar’s dominance is not due to any specific advantages that the United States enjoys, but rather to the self-reinforcing effects of the currency’s widespread adoption. The article also discusses the difficulties that other currencies face in challenging the dollar’s dominance, such as the lack of a large second-language speaker base for the Chinese yuan and the capital controls imposed by China. In conclusion, Krugman argues that the current hype surrounding de-dollarization is largely unwarranted and that the dollar is likely to remain dominant for the foreseeable future.
The moral of the story is that, even for experts, it is difficult to predict any future trend of any market—including currencies, stocks, or interest rates. Stephen Roach is a respected economist with a long track record, but he was wrong about the dollar’s future. This is a reminder that investors should be cautious about making major decisions based on market forecasts.
When you hear any prediction that evokes fear of missing out (FOMO) or fear of staying in (FOSI), it is important to not to over-react. Do your own research before making any investment decisions. Don’t rely blindly on the predictions of others, no matter how respected they may be. It’s important not to make financial decisions in a panic. Instead, wait until you are calmer and more objective, focus on the long term, and remind yourself that even the most knowledgeable experts do not own crystal balls.