The perceived relative value of currencies is determined by their relationships to one another.
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Einstein is famous for his Theory of Relativity, which isn’t actually one theory, but a set of concepts still being explored by the greatest minds in science today. Space, time, and gravity are complex, fascinating subjects, especially as they relate to one another, but in reality, everything is relative. When it comes to markets, perhaps nothing is more akin to the idea of relativity than currency valuations, because currencies are valued based upon their relationships to one another more than any other factor.
Sure, one can talk about the value of the dollar in terms of how much gold or oil it might buy, but that is really a discussion about the value of commodities, not the dollar. When we speak of dollar strength or weakness, it is in relation to other currencies. The dollar index, as popularly quoted in financial circles, is really the amount of other currencies that a dollar will buy or vice versa; that is to say, currencies are valued against one another first, and then one can calculate what amount of commodities one can acquire with a particular currency.
If currencies were actually backed by something other than their issuing government’s reputation, their value would relate more to the value of that asset (gold, for instance) than it would to the value of another government’s currency. But even though many sovereign nations hold gold as part of their national treasury reserve assets, their currencies aren’t actually backed by physical convertibility into gold. The gold is just on their balance sheets to provide stability, or the perception thereof, should economic or political turmoil cause a decline in the value of that particular sovereign’s fiat currency.
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The fact that the value of gold has surged this year while the value of the dollar relative to other major global currencies has weakened is confirmation that currency values are relative to those of other currencies, not to an asset like gold.
The dollar has fallen not only because the US is aggressively “printing” money or engaged in Modern Monetary Theory; most other major central banks are also engaged in the same activity to one degree or another, yet the value of their currencies has risen against the dollar.
The main reason the US Dollar has lost ground is the political turmoil and civil unrest that the U.S. has experienced of late. Markets are simply not accustomed to such occurrences in the United States. That’s why some of the currencies against which the dollar lost the most ground in the last two weeks of July, when global front page news was focused on civil unrest in the USA, were currencies like the Japanese Yen and the Swiss Franc. These are stable, peaceful countries. There is no news of civil unrest nor are there pending national elections that could create a polar shift in the political landscape of these countries. Does Switzerland even have elections? It is mostly only the Swiss know or care about the answer to this question, and that’s the point. No news is good news and ignorance is bliss, at least in the current world of currency valuations.
Even the EURO has gained against the dollar; a few of its members aren’t exactly poster children for tranquil political landscapes, but at the moment the Euro zone is stable, with no pending exits; it is a unified block with more perceived near term political certainty right now than the US.
Will the dollar continue to fall? Perhaps, because markets don’t like uncertainty, and things are a bit unclear right now. But US elections will come and go, which will eliminate one area of uncertainty no matter what the outcome. As for the civil unrest, it may go or it may stay, either way markets will eventually discount it by way of its absence or by way of familiarity, because lots of other countries have civil unrest, but traders have become accustomed to its presence. Everything is relative, and the US Dollar will remain the world’s global currency for a long time to come.