Forex
Dollar’s status as reserve currency to endure – Wells Fargo
Investing.com – The move by U.S. authorities to confiscate Russian assets could add to recent efforts to diversify from the dollar, but the greenback is still likely to remain the global reserve currency for the foreseeable future, according to Wells Fargo.
Is the dollar’s role as reserve currency in question?
The United States and its allies prohibited transactions with Russia’s central bank and finance ministry and blocked about $300 billion of sovereign Russian assets in the West, following Russia’s invasion of Ukraine.
Ramping up the potential punishment, the U.S. House of Representatives passed a bill late last month allowing the Biden administration to confiscate these Russian assets held in American banks and transfer them to Ukraine.
Such an action would likely result in retaliation, with Dmitry Medvedev, a close ally of President Vladimir Putin and the deputy chairman of Russia’s Security Council, stating that Russia may respond to any U.S. confiscation of its currency reserves by seizing the assets, including property and cash, of U.S. citizens.
That would have a very limited impact on the dollar in its role as a reverse currency, but would likely attract the attention of China given the Asian giant’s material exposure to the U.S. dollar.
Concerns about the U.S. fiscal outlook and the persistent use of economic sanctions by Washington have already brought the dollar’s role as a global reserve currency into question in some capital cities. Adding in the risk of having assets confiscated could reinforce the thinking.
“U.S.-China geopolitical tensions, theoretically, should prompt China to make a concerted effort to move away from dollar and other advanced economy assets,” analysts at Wells Fargo said, in a note dated May 3.
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Moves to limit dollar’s importance
There have already been some moves over the years to try and downplay the dollar’s significance.
These included developments such as Brazil and China announcing clearing arrangements in each other’s currencies, energy exporting Middle East nations willing to accept as payment, as well as a possible BRICS nation common currency.
However, Wells Fargo has downplayed the significance of these moves.
The China-Brazil trade relationship is worth only around 0.40% of total global trade, the U.S. bank noted, far from material enough to result in noticeable de-dollarization.
“We also had doubts that Middle East energy exporters, most of whom operate under a fixed exchange rate regime to the U.S. dollar, would be willing to potentially put currency pegs at risk by generating less dollar revenues,” analysts at Wells Fargo said, “and a BRICS common currency, in our view, is unlikely to gather momentum.”
Dollar reserve currency status to endure
To be considered a “reserve currency,” certain characteristics must be demonstrated, Wells Fargo said, including being freely convertible, widely accepted and used in trade and global transactions, backed by large and liquid debt markets easily accessible to foreign investors and not subject to political influence,i.e. associated with an independent central bank.
The U.S. dollar checks all of these boxes, and while other currencies are also associated with these characteristics, Wells Fargo thinks issues exist that will prevent the dollar from losing its status.
The euro and British pound are freely convertible, not pegged, nor subject to capital controls, but the government debt markets are not as deep as the U.S. and the risks of fragmentation in the eurozone could provide FX reserve managers with pause for thought.
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The Japanese government bond market has been, and continues to be, significantly distorted by the Bank of Japan, and Chinese government bonds, capital controls and convertibility concerns as well as the managed exchange rate regime of the renminbi should provide disincentive for reserve managers to allocate currency holdings toward Chinese assets.
“Taking these factors into account, we see limited alternatives for FX reserve managers to U.S. government bonds and, accordingly, view the U.S. dollar’s status as the global reserve currency as secure for the foreseeable future,” Wells Fargo added.
Morgan Stanley agreed, saying dollar influence in the global economy across a range of economic and financial metrics remains strong and thus seeking a replacement is a difficult task.
“The most discussed competitor is China, and we do expect a modestly more global role for CNY,” analysts at Morgan Stanley said, in a note last month.
“But we think that China’s ‘3D challenge’ of debt, deflation and demographics will limit CNY’s international appeal,” MS added, estimating that currency reserves in yuan should rise to only 5% in 2030 from 2.3% now.
“We expect only a moderate and gradual decline in USD’s international use, given the rise in multipolarity and continued low diversification costs for reserve managers.”
Investing.com – The U.S. dollar edged higher in European trade Friday, but was on track for a hefty weekly fall after cooling inflation and weak retail sales brought Federal Reserve rate cuts back into focus.
At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.580, marginally above a five-week low just below 104 seen earlier this week.
Dollar steadies after hawkish Fed speak
The dollar has recovered to a degree as several Fed officials, specifically members of the bank’s rate-setting committee, said that they needed much more confidence that inflation was coming down, beyond some easing inflation in April.
“I now believe that it will take longer to reach our 2% goal than I previously thought,” St. Louis Federal Reserve president Loretta Mester said on Thursday, adding that further monitoring of incoming data will be needed.
Federal Reserve Bank of New York President John Williams agreed with this view.
“I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal in the very near term,” Williams said.
However, the dollar is still on course for a weekly loss of around 0.7% after the milder than expected U.S. data raised expectations the will deliver two interest rate cuts this year, probably starting in September.
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U.S. were also flat in April and softer-than-expected, and manufacturing output unexpectedly fell.
“Our view for the near term remains that we could see a further stabilisation in USD crosses as markets await the next key data input: April core PCE on 31 May,” said analysts at ING, in a note.
Euro slips ahead of CPI release
In Europe, traded 0.1% lower to 1.0860, having traded as high as 1.0895 in the wake of U.S. inflation release, but the single currency is still up around 0.9% on the dollar this week.
The final reading of the is due later in the session, and is expected to show inflation rose by 2.4% on an annual basis in April.
The is widely expected to cut interest rates in June, but traders remain unsure of how many more cuts, if any, the central bank will agree to over the course of the rest of the year.
Traders have priced in 70 basis points of ECB cuts this year – a lot more than the just under 50 bps of easing priced in for the Fed.
fell 0.1% to 1.2658, but is still on track for gains of around 1% this week.
The Bank of England is also expected to cut rates from a 16-year high this summer, but volatility is likely to be limited ahead of the release of key U.K. inflation figures next week.
Yen slips after weak Japanese GDP data
In Asia, rose 0.3% to 155.87, close to breaking above 156, after weaker-than-expected Japanese data for the first quarter.
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traded 0.1% higher at 7.2209, moving back to six-month highs above 7.22 after data earlier Friday showed grew more than expected in April, but growth in slowed sharply, while a decline in Chinese house prices accelerated last month.
Broker ING noted the potential downside risks for the British pound, noting the currency’s recent decline from its peak against the euro. The GBP’s sensitivity to the performance of US equities was highlighted as a contributing factor to its movement.
The firm also observed a decrease in volatility for the pair as the market anticipates the release of key Consumer Price Index (CPI) figures in the UK scheduled for next week.
ING’s UK economist suggests that there may be a dovish tilt in expectations for the Bank of England’s (BoE) monetary policy. The firm maintains a favorable outlook on the possibility of the EUR/GBP pair rising, as market participants might increase their wagers on a potential interest rate cut by the BoE in June.
The British financial markets were focused on a speech delivered by Catherine Mann of the BoE, who is regarded as the most hawkish member of the Monetary Policy Committee (MPC).
This event followed comments made by Megan Greene, who recently shared a cautiously optimistic perspective on inflation, mirroring sentiments expressed by BoE Governor Andrew Bailey at the last meeting.
ING’s commentary comes as investors and analysts closely watch the central bank’s moves, which could significantly influence currency valuations. The anticipation of UK CPI data and the BoE’s potential response are key factors in the firm’s analysis of the GBP’s trajectory.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
The US dollar’s recent downtrend halted, aligning with forecasts by financial institution ING. Analysts observed that US economic data has not provided sufficient momentum to drive a significantly weaker dollar at this time.
This comes after jobless claims dropped to 222,000 from a previous week’s increase to 232,000. The labor market had shown similar patterns in January, with claims peaking at 225,000 before falling back to the range of 200,000 to 210,000.
ING anticipates a potential stabilization in USD currency pairs as investors await the release of the April core Personal Consumption Expenditures (PCE) price index, scheduled for May 31. The firm suggests that cross-asset volatility could remain subdued in the coming weeks, which may boost the search for carry trades.
Consequently, they express a lack of optimism for a recovery in the Japanese yen, currently deemed the most attractive funding currency.
In related developments, China’s latest economic figures influenced market sentiment. The country reported a 6.7% year-on-year increase in April industrial production, surpassing the expected 5.5%.
However, retail sales underperformed, registering a 2.3% growth against a forecasted 3.7%. According to ING’s economist, the data reflects ongoing caution among households and the private sector in China.
The US economic calendar for today includes the Leading Index, which is anticipated to have remained at -0.3% in April. Additionally, Federal Reserve officials Chris Waller, Neel Kashkari, and Mary Daly are scheduled to speak. ING forecasts the (DXY) to trade within the 104-105 range in the near term.
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This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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