Indeed, back in 2006, several countries were considered to be in much better economic condition than the United States. For example, during that period the Euro Area economic growth surpassed that of U.S. and as a result international investors were more willing to hedge dollar exposure with investments into the Euro Zone. Moreover, even though some economic slowdown was becoming visible in the United States, the majority of economists believed that the slump would be short and there would be no chance of spilling over to other countries. However, few months later the situation changed drastically, and the underestimated slowdown in the U.S. economy was soon transformed into a major global recession. More importantly, since everyone was being hit by the recession, the U.S. dollar was being supported by international demand for U.S. government securities.
These days, the safe heaven position of the U.S. dollar is being questioned. In this fiscal year, the government may borrow $3.25 trillion, almost four times the $892 billion in 2008. And it may increase this year budget deficit to $1.85 trillion, equivalent to 13 percent of the nation’s GDP. This will bring the U.S. financial debt very close to unsustainable levels. Indeed, with other economies also fighting recession, the yields on U.S. treasuries may rise substantially making the fiscal stimulus and central bank actions more pricey than previously estimated. For example, on June 10, Treasuries fell, pushing 10-year yields to the highest level since October, and the 30-year bond yields to the highest in a year. Looking ahead, we expect the US dollar to remain under selling pressure throughout the rest of the year.