The dollar’s position as the premier global currency has long seemed secure. The dollar accounts for about 60% of the foreign exchange reserves of central banks and similar proportions of international debt and loans. But recent developments raise the possibility of a transition to a stratified world economy in which the use of other currencies for regional trade and finance becomes more common.
Such a statement may seem to be inconsistent with the Federal Reserve’s activities to stabilize global financial markets. As it did during the global financial crisis of 2008-09, the Fed has activated currency swap lines with other central banks, including those of the Eurozone, Great Britain, Japan, Canada and Switzerland, as well as the monetary authorities of South Korea, Mexico, and Singapore. Those central banks that do not have swap agreements can borrow dollars from the Fed via its new foreign and international monetary authorities (FIMA) facility. Under this program, central banks that need dollars for their domestic financial institutions exchange U.S. Treasury securities for dollars through a repurchase agreement. These moves accompany the Fed’s extensive range of activities to support the U.S. economy, which include cutting the federal funds rate to zero, purchasing large amounts of Treasury, mortgage backed and corporate securities, and lending to corporations and state and municipal governments.
But other governments are uneasy with the U.S. government’s use of the dollar’s position in international finance to enforce compliance with its foreign policy goals. International transactions in dollars are cleared through the Society for Worldwide Interbank Financial Telecommunications (SWIFT) banking network and the Clearing House Interbank Payments System (CHIPS). The U.S. has denied foreign banks access to these systems when they wanted to penalize the banks for dealing with governments or companies that the U.S. seeks to punish. This practice has become more common under the Trump administration, which has used the sanctions to strike at Iran, North Korea, Russia, Venezuela, and others.
https://fred.stlouisfed.org/graph/?g=nMOb
January 15, 2018
Real Broad Effective Exchange Rate for China, Euro Area and United
States, 2000-2018
(Indexed to 2000)
https://fred.stlouisfed.org/graph/?g=nMOc
January 15, 2018
Real Broad Effective Exchange Rate for China, Euro Area and United
States, 2007-2018
(Indexed to 2007)
I have virtually no understanding of currency markets and what you say makes sense and is certainly consistent with the notion that everything the moron in chief touches turns to crap, but how much will the underlying economics play a role? I know that during the financial crisis and the immediate aftermath, there were any number of commentators predicting the dollar would weaken and inflation would skyrocket because of deficit spending, low interest rates and a crippled economy. None of that came to pass because of the intense deflationary pressures, the whole world’s low interest rates and the fact that as bad as the US economy was, the rest of the world including China was worse. We are once again engaging in massive deficit spending—not enough in my view— with almost non existent interest rates and a severely crippled economy. I know of no one fretting about inflation although interruptions to supply chains and hoarding have caused the price of food and some other commodities to rise, but some people are predicting the dollar’s fall and I believe it has fallen some since the pandemic erupted. Although the world economy is likewise severely crippled, Europe and China both seem to have greater potential for recovery than the US because they have gotten a better handle on the virus than the US. Add the points you make and maybe this time it will be different.
https://fred.stlouisfed.org/graph/?g=owlr
August 4, 2014
Real per capita Gross Domestic Product for China and United States, 2007-2018
(Percent change)
https://fred.stlouisfed.org/graph/?g=owlt
August 4, 2014
Real per capita Gross Domestic Product for China and United States, 2007-2018
(Indexed to 2007)
Adding the Pound as an international currency:
https://fred.stlouisfed.org/graph/?g=sc96
January 15, 2018
Real Broad Effective Exchange Rate for United Kingdom, Euro Area,
United States and China, 2000-2018
(Indexed to 2000)
https://fred.stlouisfed.org/graph/?g=sc98
January 15, 2018
Real Broad Effective Exchange Rate for United Kingdom, Euro Area,
United States and China, 2007-2018
(Indexed to 2007)
“I know that during the financial crisis and the immediate aftermath, there were any number of commentators predicting the dollar would weaken and inflation would skyrocket because of deficit spending, low interest rates and a crippled economy. None of that came to pass because of the intense deflationary pressures, the whole world’s low interest rates and the fact that as bad as the US economy was, the rest of the world including China was worse….”
Actually, China experienced no recession between 2007-2009 but rather Chinese real GDP grew at
2007 ( 14.2)
2008 ( 9.6)
2009 ( 9.2)
https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?pr.x=81&pr.y=12&sy=2007&ey=2019&scsm=1&ssd=1&sort=country&ds=.&br=1&c=924%2C111&s=NGDP_RPCH%2CPPPSH&grp=0&a=
Where does the quote come from? I cannot find it.
“I know that during the financial crisis and the immediate aftermath, there were any number of commentators predicting the dollar would weaken and inflation would skyrocket because of deficit spending, low interest rates and a crippled economy. None of that came to pass because of the intense deflationary pressures, the whole world’s low interest rates and the fact that as bad as the US economy was, the rest of the world including China was worse….”
Joseph Joyce:
But the imposition of a new security law for Hong Kong raises concerns about China’s willingness to allow financial concerns to affect its political goals….
[ I could not understand this sentence. Political goals always effect or constrain financial concerns in any mature country, and that is the case for China or Japan or Germany. ]
There have been euro-denominated bonds for some time, albeit issued by individual nations.
Somehow the EU payments entity set up to get around SWIFT has not taken off. Hardly being used. Back to any company or entity big enough to want to have dealings in the US must use SWIFT or will get blocked from doing business in US. Thus, so far only small entities using this alternative.
Maybe it can take off, but not clear what yet will make it work, although if Trump is defeated, may not need it as Biden will probably bring all (or most) of those sanctions on Iran to an end, if after a bit.
Joseph Joyce:
International transactions in dollars are cleared through the Society for Worldwide Interbank Financial Telecommunications (SWIFT) banking network and the Clearing House Interbank Payments System (CHIPS). The U.S. has denied foreign banks access to these systems when they wanted to penalize the banks for dealing with governments or companies that the U.S. seeks to punish….
[ How then does Russia trade without using these systems? ]