Forex
In the Market: How the US is daring the world to find a dollar alternative
By Paritosh Bansal
(Reuters) -The United States is merrily chipping away at the pillars that hold up the dollar as the world’s reserve currency, with the latest blows coming from some powerful Americans questioning the rule of law following the conviction of Donald Trump.
In doing so, it is effectively daring the rest of the world to find an alternative – and so far, it appears to be winning.
The attacks on the legal system in the aftermath of former President Trump’s conviction follow other moves that are seen by some as the United States throwing down the gauntlet to the rest of the world.
The country has radically increased the use of sanctions as a punitive foreign policy tool. And it is adding on an immense amount of debt, leaving hapless foreigners who seek the safety and depth of its markets to fund its excesses.
Over the past three weeks, I have been asking financial services executives, global investors and other experts in Asia and the United States how long they think the Americans can keep at it without meaningful blowback. Several of the sources requested anonymity to speak candidly about the situation.
These conversations showed consternation is growing, both at home and abroad, about the consequences of U.S. hubris. But despite trying, no one so far has been able to find a credible alternative or expects one to emerge anytime soon, and they have partly themselves to blame.
In Asia, for example, people are asking with increasing urgency what’s their ‘America plus 1’, as they search for ways to reduce their U.S. exposure and boost non-dollar trade flows.
But attempts to build such systems are slow-going or haven’t gotten traction. And rising authoritarianism, threats to individual and property rights and geopolitical tensions have meant that even if U.S. assets are less attractive than they were before, other options are worse.
A recent survey, for example, shows central bank reserve managers plan to increase their dollar holdings over the next 12-24 months as the rise in global geopolitical tensions and need for liquidity draw them to the currency.
“Perhaps ironically, the U.S. dollar’s strength is, in part, due to its near-unchallenged safe-haven status,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University, who served on former President Ronald Reagan’s Council of Economic Advisers. “That said, most investors don’t understand geopolitics and the dangers that lurk below the surface – until it’s too late.”
DOLLAR’S DOMINANCE
At its core, the dollar’s dominant role in the world draws from the United States’ democratic principles. It is supported by the massive size of its economy, the depth of its markets, and the strength of its institutions and the rule of law.
The belief in democracy runs deep. Last week, I asked U.S. Securities and Exchange Commission Chair Gary Gensler, who has been in government since 1997, whether partisan politics had made the job of officials like him harder. A conservative-leaning U.S. appeals court had struck down one of his signature initiatives that morning.
“I believe in this constitutional system that we have. It’s messy,” Gensler said. “It’s democracy.”
Nevertheless, the messiness is testing some of the underpinnings of the dollar’s global appeal.
Attacks on the U.S. legal system have increased after the Trump verdict in a New York court. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on the social media platform X, saying “the verdict represents the culmination of a legal process that has been bent to the political will of the actors involved.”
A major investor based in Asia said potential threats to U.S. institutions were also worrying. Any debasing of the Federal Reserve’s authority — as Trump allies are reportedly contemplating — would affect the dollar’s credibility, the investor said, adding that such a development could see a double-digit depreciation of the currency.
Trump’s campaign for his Republican presidential bid has played down such reports of what conservative groups might be planning.
THICKET OF SANCTIONS
A senior New York-based financial services executive who was traveling in Asia said he is hearing from clients who think the U.S. and Western financial policy is “undermining the dollar and the Western financial system more broadly.”
He pointed to an “ever expanding thicket of sanctions” as one reason.
And the West is pushing the envelope further. The financial executive said the discussion that the West might seize some $300 billion of sovereign Russian assets that were blocked over Ukraine undermined the United States’ safe haven status. “The West crossed a Rubicon there,” the executive said.
An October 2021 Treasury Department review of sanctions found such designations had increased to 9,421 by that year from 912 in 2000. It noted at the time that “American adversaries — and some allies — are already reducing” their use of the dollar.
An Asia-based investor said he was watching another court case closely to test the strength of the rule of law: ByteDance’s challenge of a U.S. ban on TikTok. He is watching for the evidence that the U.S. government would produce to back up claims of the app being a national security threat.
If no proof is publicly offered, then it would “feel that the checks and balance, the independence of the legal system, may not be there — at least in this case,” the investor said.
But then he added that even that may not turn him away from the United States. It’s still more independent and better than many other places, he said.
By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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