Many economists and analysts have predicted the coming crash of the US dollar. The primary driver is the huge deficit of $31 trillion.

I want to give my perspective of how this event might occur.

The US Fed starting increasing interest rate in March 2022 and has made a few rounds of increases in the subsequent months. This caused investors and speculators to sell foreign currencies to buy US dollars to earn the higher interest rate.

The US dollar appreciated by an average of 15% against the major traded currencies during the year.

Why has the US dollar appreciated when it should be weakening due to the large national debt and the excessive money printing over the past years? Surely, when a government prints currency, the value of the currency should collapse.

The reason given by most observers is that the US dollar is a reserve currency, and most other countries keep their foreign reserves in the US dollar. They need it to pay for purchase of goods from other countries.

Another factor is that the US dollar is a bubble. When an asset becomes a bubble, speculators buy the asset expecting that it will continue to appreciate. This is the behavior of all asset bubbles, until it reached an unsustainable level and the bubble burst.

What is the unsustainable level for the US dollar? When will the bubble burst?

Many countries found that their currencies have depreciated against the US dollar. To maintain the strength of their currency, they are forced to take one of two possible steps

a) Increase their interest rate to match US interest rate, and minimize the sale of their currency for US dollar

b) Sell US bonds to obtain US dollars to defend their currencies.

Several major countries have started to sell the US bonds in large quantities over several months. The sale of US bonds causes the bond values to drop and the yields of the bonds to rise. The higher yields will cause the US government to pay more interest on their national debts. This will worsen their fiscal deficit.

The higher interest rate on the US bonds and on short term cash will cause the US economy to enter into a recession. This is expected to occur in 2023.

When the US starts to enter into a recession, the speculators will start to sell the US dollar. This will cause an avalanche. The fall will be rapid and severe.

I expect the tipping point to be sometime in 2023. We will see a massive collapse of the US dollar.

When the speculators and investors sell the US dollar, where will they move their funds? They may move into the other major currencies, or into gold and other precious metals.

Some analysts expect gold price to soar in 2023.

The central banks of many countries have been buying gold for their national reserves for the past decades. They took this action to avoid holding too much of their reserves in the US dollar, which they expect to depreciate in value, due to their large and growing fiscal deficits.

The purchase of gold by the central bank increased significantly in 2022. They may increase their purchase further in 2023.

Many investors have started to have some gold in their portfolio to hedge against this event.

Tan Kin Lian