The US dollar is on the verge of a 35% collapse. It could also lose its status as the world’s reserve currency. This is according to Stephen Roach, a senior fellow at Yale University and the former chairman of Morgan Stanley Asia.
The reason, according to Roach, is the slow decoupling of the US from its trade partners. Along with this, another reason is the rise of China. He says China’s structural reform goes away from a manufacturing economy. Instead, it comes into a more service-oriented economy with a stronger consumer base. This could mean the days of the US dollar being the world’s reserve currency are numbered.
Merely suggesting that the US losing its reserve currency status is enough to bring out the critics. In an opinion piece he wrote for Bloomberg, Roach addresses those critics.
“Scorn has long been heaped on those daring to question the supremacy of the U.S. dollar,” he starts. “As the world’s dominant reserve currency…the counter-arguments were strong and highly political, basically boiling down to the so-called TINA defense – that when it comes to the dollar, ‘there is no alternative.'”
The Role of The Dollar
Roach says that even those that believe there is no alternative to the US dollar when it comes to international trade. The same goes for when the financial markets are being shortsighted.
“Alas, the TINA argument doesn’t stop there. The counter to my case for dollar weakness also rests on the reserve status of the U.S. currency as the linchpin of world financial markets. All trading nations, goes the argument, have to hold the dollar as the price for doing business in an increasingly integrated dollar-based world economy.
“Even so, the dollar’s share of official foreign-exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the Bank for International Settlements. That downtrend could gather momentum in the years ahead, especially with the U.S. currently leading the charge in de-globalization and decoupling. With America’s share of reserves well in excess of its share in world GDP and trade, such a correction might well be inevitable in an increasingly fragmented, multi-polar world.”
The natural instinct for a weak dollar is to buy hard assets like gold. However, Roach says those markets are simply too small. They will not be able to absorb the tsunami of dollars looking for a new home.
“And although cryptocurrencies and gold should benefit from dollar weakness, these markets are too small to absorb major adjustments in world foreign-exchange markets where daily turnover runs around $6.6 trillion.”
Gold and cryptocurrencies are too small to benefit. Although, Roach says he does expect two currencies to strengthen as the dollar weakens: the Chinese renminbi and the euro.
Can It Be Replaced?
“On this basis, a forecast of a weaker dollar requires some combination of a strengthening in China’s renminbi and the euro…
“The China call is very contentious. From the trade war to the coronavirus war to the distinct possibility of a new Cold War, the negative case for China has never been stronger in the U.S. than it is today.”
“The call on the euro is also counterintuitive, especially for a broad consensus of congenital euro-skeptics like me… I now have to concede that reports of the euro’s imminent death have been greatly exaggerated. Time and again, especially over the past 10 years, Europe has risen to the occasion and avoided a catastrophic collapse of its seemingly dysfunctional currency union. From Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro from a sovereign debt crisis to the recent Angela Merkel-Emmanuel Macron commitment to a Next Generation European Union Fund of 750 billion euros ($855 billion) to address the coronavirus crisis, the great European experiment has endured extraordinary adversity… there is unmistakable upside for the most unloved currency in the world.”
Roach ends his article by pointing out that no country has ever devalued its currency and enjoyed prolonged prosperity.
“If TINA is the dollar’s only hope, look out below… Yes, a weaker dollar would boost U.S. competitiveness, but only for a while. Notwithstanding the hubris of American exceptionalism, no leading nation has ever devalued its way to sustained prosperity.”
Fed Keeps 0% Rates Until At Least 2022
Confirming what many expected, the Federal Reserve announced yesterday that it will keep rates at zero percent for the foreseeable future, perhaps well into 2022.
During a press conference, Fed Chairman Jerome Powell said, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
The Fed did acknowledge that economic conditions “have improved” in the last few months. However, none of the members indicated an urgency to raising interest rates. In “dot plots,” each member plots their forecast for interest rates. However, in this case, only two of the 17 members saw a case for hiking rates in 2022.
The decision to keep rates at near-zero percent indefinitely is an attempt to get the economy back to where it was before the coronavirus pandemic. During the said pandemic shut down our country and plunged our economic output by an estimated 50% this quarter.
The outlook from Fed members is for real GDP to contract by 6.5% in 2020. This comes with an unemployment rate of 9.3% by the end of the year. The members are much more optimistic about 2021. Members projecting an unemployment rate down to 6.5% and real GDP reaching 5%.
There are already positive signs, with last week’s controversial jobs report showing 2.5 million jobs were added in May.
Powell cautioned, however, that the millions of jobs lost will unlikely return quickly, if ever.
He says that many businesses may simply not reopen. Alternatively, he also says that jobs eliminated during the pandemic may not exist in the “new world order.”
The Federal Reserve keeping rates low while printing trillions of dollars to help the country recover from the coronavirus pandemic. With this, there are some very real fears that inflation is going to spiral out of control. Many fear that this will soaring well above the Fed’s target of 2%.
Thus far, the Fed members seem unconcerned about the possibility of runaway inflation.
Plans and Expectations
The average Fed member expects inflation (as measured in core personal consumption expenditures) of just 1.0% in 2021, increasing slightly to 1.5% in 2021.
The Fed will also continue to do its part to keep liquidity in the markets by buying up assets including mortgage-backed securities and Treasurys. The FOMC told the New York Fed to keep purchases “at least at the current pace,” which indicates about $80 billion per month for Treasuries and about $40 billion per month for mortgage-backed securities.
These actions along with other quantitative easing measures have inflated the Fed balance sheet to a record $7 trillion, a number that Powell has indicated he is comfortable with.
During a webinar hosted by Princeton University a few weeks ago, Powell said that the Federal Reserve has “crossed a lot of red lines that had not been crossed before and I’m very comfortable that this is that situation in which you do that and then you figure it out afterward.”
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Stocks Rally as Oil, Jobless Claims Rocket Higher
The stock market rally continued yesterday with the Dow Jones Industrial Average jumping 2.24%, the S&P 500 gaining 2.28% and the Nasdaq up 1.72%.
Investors felt optimistic after President Trump tweeted that he had spoken with Saudi Arabian Crown Prince Mohammed bin Salman. Many were hoping that both Saudi Arabia and Russia were willing to end the price war and mutually agree to cut production by at least 10 million barrels per day.
“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump tweeted.
However, some experts are doubting the reality of cutting production by such a significant amount.
Edward Marshall, a commodities trader at Global Risk, told The Wall Street Journal, “It’s physically impossible for Saudi Arabia and Russia to get 10 million barrels a day off the market—they’d burst their onshore storage and fill every ship in sight.”
News also broke that Saudi Arabia called for an emergency meeting of OPEC and other oil-producing countries. The country called for a meeting to talk about how they can stabilize the oil market. Prices have been in freefall since the last meeting ended without a production agreement beyond April 1.
This was enough to send oil prices rocketing higher. West Texas Intermediate crude gained as much as 34% intraday before settling at $25.32 per barrel, a 24.7% jump. This is its largest single-day percentage gain in history.
Even with prices moving higher, it may not be enough to prevent bankruptcies in the oil and gas sector. This wave of bankruptcies was kicked off by shale driller Whiting Petroleum Corp. on Wednesday.
Jobless Claims Set Record
The market’s rally yesterday came in spite of some very bad news early in the day. Initial jobless claims for the week ending March 28 came in at 6.6 million. This figure is nearly double the previous week’s then-record of 3.2 million.
To put this number in a historical perspective, prior to the last two weeks, the previous record number of claims in a single week sat at 665,000 in March 2009 during the Great Recession.
To put it simply, this week’s initial jobless claims number was equal to the total claims filed during the entire Great Recession.
Chris Rupkey, chief financial economist for MUFG Banks, wrote in an email, “We knew that massive job losses were coming because of reports that many workers were unable to file a claim for benefits even after waiting on line for hours. Everywhere you look Washington and state governments were not prepared for the rapid spread of the virus and the devastating damage that would be done to the economy if businesses were shut down and workers sent home.”
He added “In a normal recession, job layoffs build over the many months of recession until they peak. In this pandemic-based recession, the job losses are immediate where the economy’s weakest hour is right now.”
Why was the market able to rally despite historically bad jobless claims?
JJ Kinahan, chief market strategist at TD Ameritrade, says it’s possible that the market knows it’s going to get worse. He also mentioned that this number won’t seem as bad in the coming weeks.
“Overall this is a little bit of a victory in and of the fact that it was such a bad number and the market did kind of shake it off. It is also the market preparing for a lot more bad numbers.”
US Federal Reserve Makes Emergency Interest Rate Cut
The US Federal Reserve has slashed interest rates in an emergency move to protect the world’s largest economy from the coronavirus outbreak, ramping up the global response as the disease spreads.
In a dramatic intervention as the G7 group of wealthy nations promised action around the world to protect jobs and growth amid the unfolding crisis, the US central bank said it was cutting interest rates by half a percentage point to a target range of 1% to 1.25%.
Launching the emergency measure as a pre-emptive strike to protect the US economy after pressure from Donald Trump to act, the Fed warned: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
Jerome Powell, its chair, said: “Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”
As the economic costs mount in a pivotal US election year, Trump said the Fed had not cut rates enough and should go further. Powell insisted the emergency move was not in response to the president’s pressure. “We are never going to consider any political considerations whatsoever,” he said.
Financial markets around the world rallied after the worst week for stocks since the financial crisis, in anticipation of massive coordinated stimulus to protect the global economy. The FTSE 100 closed up around 1% at 6,718.20. However, Wall Street slumped after a rebound on Monday, and was down 600 points by mid-afternoon in New York.
On a day of rapid developments in response to the escalating health crisis:
- The G7 issued a statement saying wealthy nations would use “ all appropriate policy tools ” to tackle the economic fallout.
- The UK government outlined contingency plans, including limits on police and fire service callouts.
- Growing numbers of companies announced profit warnings and told staff to work from home.
Speaking on Tuesday morning before the emergency move from his transatlantic counterpart, Mark Carney said the Bank of England stood ready to cut rates if the British economy required.
In his final hearing before MPs on the Treasury committee before standing down on 15 March, when he will be replaced by Andrew Bailey, the Bank’s outgoing governor said the fallout in Britain could include an “economic shock that could prove large but will ultimately be temporary”.
“The Bank will take all necessary steps to support the UK economy and the financial system,” he added.
Carney said that lines of communication were open with other central banks, that the Bank’s rate-setting monetary policy committee (MPC) met on Monday and that it was still “assessing the economic impacts and considering the policy implications of various different scenarios”.
The next MPC rate decision is due on 26 March, after Carney leaves. However, economists at the Japanese bank Nomura said they anticipated an emergency UK rate cut before the end of the week.
Threadneedle Street has limited room to cut borrowing costs with interest rates at 0.75%, among the lowest levels in its 325-year history. There are also growing expectations that the chancellor, Rishi Sunak, will use next week’s budget to announce financial support to try to lessen the impact of Covid-19.
The coronavirus outbreak is causing widespread alarm. The Paris-based Organisation for Economic Cooperation and Development has warned global growth could be cut in half.
UK banks are starting to offer emergency financing to businesses that are showing signs of strain. Barclays, RBS and Santander have sent messages to thousands of firms to check whether factory disruptions in China have put their supply chains and cash flow at risk.
Barclays has extended its first batch of overdrafts and short-term loans, while the Guardian understands RBS is contacting about 5,000 of its large and small business customers who may be exposed to disruption, offering them similar support.
Twitter told its staff to work from home in response to the outbreak. It has made remote working mandatory for employees in Hong Kong, Japan and South Korea and said it was “strongly encouraging” its global workforce of 5,000 employees to do the same.
In the UK, the impact of the outbreak was reflected in company statements and updates on consumer behaviour. Kantar, the data company, said consumers were stockpiling hand sanitiser, with sales up 225% in February.
The British insurer Direct Line said it had received £1m of travel insurance claims relating to the outbreak. It will pay out for cancellation or curtailment of trips to places such as China, South Korea and northern Italy, if they were booked before the government advised against travel.
The product-testing company Intertek warned that temporary disruption to the supply chains of its clients in China would hit its 2020 performance, while Greggs said the coronavirus added a cloud of uncertainty to its future sales forecasts if shoppers stayed away from high streets.
The tour operator Tui also said it had suffered weaker bookings and set out plans to cut costs with a hiring freeze and postponing non-essential projects. After a plunge in its share value amid the coronavirus outbreak, the travel business is likely to be ejected from the FTSE 100 on Wednesday in the quarterly reshuffle of the index of leading UK company shares.
Copyright © 2020 theguardian.com. All rights reserved.
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