When Will the US Dollar Collapse?

When Will the US Dollar Collapse?

How and When That Could Occur

 By Kimberly Amadeo   Updated August 19, 2019

A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.

Two Conditions That Could Lead to the Dollar Collapse

Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. Between 2002 and 2018, the dollar declined 6% according to the U.S. Dollar Index. Why?

The U.S. debt almost tripled during that period, from $6 trillion to $22 trillion. The debt-to-gross domestic product ratio exceeded 100%. That increased the chance the United States would let the dollar's value slide so it could repay its debt with cheaper money.

Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Richard Nixon abandoned the gold standard.

As a global currency, the dollar is used for half of all cross-border transactions. That requires central banks to hold the dollar in their reserves to pay for these transactions. As a result, 61% of these foreign currency reserves are in dollars.

The next most popular currency after the dollar is the euro. But it comprises less than 30% of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.

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