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 Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The yen edged lower from a 2-1/2-month high against the U.S. dollar on Thursday, as financial markets stabilized, with investors looking ahead to next week’s Bank of Japan meeting which could see a potential rate hike.
The Japanese unit this week rallied sharply as market participants unwound their long-held bets against the currency. At the same time, a plunge in global stocks in recent sessions had driven investors toward traditionally safe assets such as the Swiss franc and yen.
U.S. equities, however, recovered on Thursday after a steep sell-off in the previous session.
For the week, the yen has risen 2.4%, on track for its best weekly gain since late April. The greenback was last slightly down at 153.84 yen.
The dollar, however, trimmed losses against the yen and euro after data showed the world’s largest economy expanded faster than expected and inflation slowed in the second quarter. That reduced brewing expectations of a larger-than-expected rate cut in September, or a sudden Federal Reserve easing at next week’s meeting.
“The Japanese yen is flatlining on diminished safe-haven demand, and the speculative fervor behind its recent bull run seems to be running out of steam,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“We think markets have gotten a little too far over their skis given that underlying economic fundamentals don’t yet support a rapid tightening cycle from the Bank of Japan, and that rate differentials will remain wide even if the Fed begins cutting in coming months.”
The rate futures market has priced in a 67.2% chance that the BOJ will raise rates next week by 10 basis points (bps), up from about 40% earlier in the week, according to LSEG estimates.
The euro was slightly up against the dollar at $1.0846 , with the flat at 104.36. The index was at 104.21 just before the release of economic growth data.
Advance estimates showed that U.S. gross domestic product (GDP) grew at a 2.8% annualized rate in the last quarter. Economists polled by Reuters had forecast GDP rising at a 2.0% rate.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased at a 2.9% rate after surging at a 3.7% pace in the first quarter.
Against the Swiss franc, the dollar dropped 0.5% to 0.8806 francs.
AHEAD OF ITSELF
“The market got ahead of itself on Fed cuts. Before the GDP number, the market is pricing as if the Fed is going to cut 50 basis points in September,” said Marc Chandler, chief market strategist at Bannockburn Forex in New York.
He also cited comments from former New York Fed President Bill Dudley in a Bloomberg column on Wednesday, who said the Fed should cut rates next week, citing recent employment data.
“The GDP number shows that the Fed is not under that kind of urgency,” Chandler said.
The Fed remains firmly on track to cut interest rates in September, according to fed funds futures data. The futures market has also priced in about 68 basis points (bps) of cuts this year, based on LSEG calculations.
U.S. jobless claims data were also consistent with an economy still holding up well.
Initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 235,000 for the week ended July 20, the data showed. Economists polled by Reuters had forecast 238,000 claims for the latest week.
The only blemish, however, was the U.S. durables report, which showed durable goods orders fell 6.6% in June on slumping transportation orders, compared with expectations for a 0.3% rise.
In other currencies, the Australian dollar fell to US$0.6519, its lowest since early May. It was last down 0.6% against the greenback at US$0.6541.
rallied against the dollar, which fell to its lowest since early May at 7.205, as the yen’s rally spilled over to the Chinese unit. The dollar was last down 0.2% at 7.245
Currency
bid
prices at
25 July
07:28
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar 104.31 104.38 -0.05% 2.90% 104.45 104.
index 07
Euro/Doll 1.0852 1.084 0.12% -1.68% $1.087 $1.0
ar 829
Dollar/Ye 153.9 153.86 0.01% 9.09% 154.3 151.
n 96
Euro/Yen 1.0852 166.79 0.13% 7.31% 167.59 164.
83
Dollar/Sw 0.8806 0.8852 -0.53% 4.62% 0.8854 0.87
iss 78
Sterling/ 1.2861 1.2906 -0.33% 1.08% $1.2913 $1.0
Dollar 829
Dollar/Ca 1.3808 1.3808 0% 4.16% 1.385 1.37
nadian 97
Aussie/Do 0.6549 0.6582 -0.46% -3.92% $0.6582 $0.6
llar 511
Euro/Swis 0.9554 0.9594 -0.42% 2.89% 0.9598 0.95
s 22
Euro/Ster 0.8435 0.8397 0.44% -2.69% 0.8439 0.83
ling 95
NZ 0.5893 0.593 -0.68% -6.8% $0.593 0.58
Dollar/Do 73
llar
Dollar/No 11.0151 11.0265 -0.1% 8.68% 11.1381 10.9
rway 83
Euro/Norw 11.9548 11.953 0.02% 6.49% 12.0856 11.9
ay 317
Dollar/Sw 10.8111 10.7772 0.31% 7.39% 10.8685 10.7
eden 65
Euro/Swed 11.7314 11.6822 0.42% 5.45% 11.7786 11.6
en 784
Citi highlighted the Japanese yen’s major support level against the US dollar, noting that the pair had maintained its position above the 152 mark.
This level was previously identified as a significant resistance point throughout 2022 and early 2023, and it served as a crucial breakout area in 2024. Additionally, the 200-day moving average (200dma) is positioned just below this threshold at 151.54.
The firm observed that the stronger-than-expected US GDP and Core Personal Consumption Expenditures (PCE) figures released today, coupled with their anticipation of a hawkish Federal Reserve and no change in policy from the Bank of Japan (BoJ), present an attractive risk/reward scenario for investors considering tactical long positions in the USDJPY pair heading into next week.
Citi clarified that this recommendation is tactical in nature, given their broader expectation of a risk-off environment with heightened volatility over the coming months. They suggest that while high volatility can lead to aggressive counter-trend movements, it is also an opportunity to capitalize on.
Looking ahead, Citi anticipates better opportunities to sell the USDJPY pair, which may arise soon. They speculate that a rally to the 55-day moving average (55dma), which stands at 157.75, could offer appealing levels for selling if it materializes.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The U.S. dollar slipped lower Thursday, the euro posted small gains while the Japanese yen climbed to multi-month highs ahead of next week’s Bank of Japan meeting.
At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 103.950, extending an overnight decline.
Dollar slips ahead of GDP data
The dollar retreated Thursday, extending an overnight decline amid increasing confidence that the will cut interest rates in September.
data for the second quarter are due later in the session, and is expected to show annualized growth of 2.0%.
This would be above the 1.4% growth seen in the first quarter, but would remain considerably slower than the 4.2% pace seen in the second half of last year.
The release will also show inflation slowed considerably last quarter, with the GDP price index falling to 2.6% from 3.1%, ahead of Friday’s price index data, the Federal Reserve’s favored gauge of inflation.
The Fed is set to meet next week, and is widely to keep interest rates steady while signaling a rate cut in September.
German business morale falls again
In Europe, rose 0.1% to 1.0847, with the euro edging higher despite German business morale unexpectedly falling in July, the third consecutive decline in Germany’s most prominent leading indicator..
The Ifo institute said its sank to 87.0 in July from 88.6 in June.
“The German economy is stuck in the crisis,” said Ifo president Clemens Fuest.
The kept interest rates on hold at 3.75% last week, but markets are pricing in just short of two more ECB rate cuts for the rest of this year.
traded 0.2% lower at 1.2885, falling back from the 1.30 level ahead of next week’s Bank of England policy-setting meeting.
UBS expects the central bank to trim interest rates in what is widely seen as a close call as to when it will start what is likely to be a slow and steady reduction path.
Yen goes from strength to strength
In Asia, fell 0.7% to 152.72, with the pair falling to its weakest level in 2-1/2 months as traders abandoned short yen bets in the run up to the BOJ’s July meeting in the wake of suspected currency market intervention by the Japanese government.
The is expected to consider a 10 basis point hike, and could unveil a plan to roughly halve bond purchases in coming years.
“USD/JPY has now corrected 6% off its high. This has proved another successful intervention campaign for Japanese authorities,” said analysts at ING, in a note.
“We think the success of the intervention has had less to do with the size of the FX sales and more to do with the timing. As was the case in September/October 2022, Japanese FX intervention has been timed to coincide with a dovish reappraisal of Fed policy. Very clever.”
slipped 0.5% lower to 7.2281, but remained near an eight-month high amid persistent concerns over a slowing economic recovery in the country. Surprise rate cuts by the People’s Bank added to pressure on the currency and did little to lift spirits over the Chinese economy.
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