If I have to read one more these rubbish assessments of the decline of the USD I will be reaching for my revolver. Via Harry Sender at the FT:
One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar’s status as the world’s reserve currency.
That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced.
“The Trump administration’s ‘America First’ policy will encourage a long-term move away from the US dollar,” according to Christopher Wood of CLSA, the arm of Beijing-based Citic Securities, pointing to “the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like”.
At the Milken Institute’s Asia Summit last month, former French prime minister François Fillon spoke of the need for Europe to push its currency as an alternative to the dollar in an effort to bolster European sovereignty.
This is incoherent. The US is not “weaponising” the dollar, except to shoot itself. Why is the White House constantly jawboning it down? Because America First has decoupled US growth from global and the strong dollar is the result.
There is some risk that a rampant Donald Trump could damage USD hegemony, if he sacked the Fed chief in a fit of pique, for instance. But even that pales next to the troubles facing CNY, which has been thoroughly discredited by its closure of the Chinese capital account. This became necessary after Chinese nationals couldn’t dump their own currency fast enough from 2014 as the “rebalancing” project illustrated that it will also smash growth. So why would anybody else want it?
The same problem of arbitrary intervention dogs Chinese debt and equity markets where “national teams” raid asset classes at will. Why would anyone want to hold CNY if the assets themselves aren’t liquid and safe.
Then there is the forex market which is still based entirely around USD denominations.
There will be areas where CNY will grow. In commodities for instance. And this could eventually establish a kind of alternate pole of global currency trading but with which allies? Russia and Venezuela won’t change the world. These markets are tiny by comparison to global forex, debt and equity flows.
As for the euro, pfft. Sort out a common bond market and get an army then we can talk.
I have absolutely no doubt that the USD will crash into the new economic cycle as the Fed launches QE12, especially now that the twin deficits will be enormous:
And there’ll be usual whining and backlash and diversification of reserves.
But don’t mistake that for any change in USD hegemony.