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Dethroning the King: Five ways Trump could weaken the dollar
Can President Trump instruct the US Treasury to intervene in FX markets and weaken the dollar? Twelve months ago, we wouldn’t have even considered this question. But under this new mercantilist US regime, who knows? We identify five ways in which Washington could try to engineer a weaker dollar
- Key messages: Time to consider how Trump could weaken the dollar
- White House needs a weak dollar for US trade policy consistency
- Dethroning the King: President Trump’s toolkit to weaken dollar
- US Treasury FX Intervention | Likelihood: Very Low | Impact: Limited
- Altering the Fed’s mandate | Likelihood: Very Low | Impact: High
- White House dollar jawboning | Likelihood: High | Impact: Negligible
- Pressure major trading partners to strengthen their currencies | Likelihood: High | Impact: Medium
- A US Sovereign Wealth Fund | Likelihood: Very Low | Impact: Medium
- Bottom line: Weak dollar policy will be self-fullfilling
- Footnotes
Key messages: Time to consider how Trump could weaken the dollar
- President Trump’s ramped up verbal jawboning in recent weeks suggests that current USD strength may be the upper bound of the White House’s tolerance level
- We identify five policies that the White House could employ to weaken the dollar: (1) US FX intervention and building out US FX reserves; (2) Changing the rules of the game for the Fed; (3) Ongoing jawboning and talking down the dollar; (4) Pressuring major trading partners to strengthen their currencies; (5) Creating a US sovereign wealth fund.
- We don’t think any small-scale unilateral intervention by US authorities will have a sustained impact on weakening the dollar. The best historical precedent – the Bush FX interventions in 1989-1990 – shows that this approach had a limited impact in driving the USD materially lower.
…click on the above link to read the rest of the article…
The Birth Of The PetroYuan (In 2 Pictures)
The Birth Of The PetroYuan (In 2 Pictures)
It belongs to the Chinese now!
h/t @FedPorn
As we previously detailed, two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.
In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:
Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.
Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidityfrom financial markets for the first time in nearly two decades:
…click on the above link to read the rest of the article…
Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters
Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters
Papering over the structural imbalances in the Eurozone with bailouts or bail-ins will not resolve the fundamental asymmetries in trade.
Beneath the endless twists and turns of Greece’s debt crisis lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.
The key imbalance is between export powerhouse Germany and its trading partners, which run large structural trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.
Those outside of Europe may be surprised to learn that Germany’s exports ($1.5 trillion) are roughly equal to the exports of the U.S. (1.6 trillion), and compare favorably with China’s $2.3 trillion in exports, given that Germany’s population of 81 million is a mere 6% of China’s 1.3 billion and 25% of America’s population of 317 million.
German GDP in 2014: $3.82 trillion
Chinese GDP in 2014: $10.36 trillion
U.S. GDP in 2014: $17.42 trillion
Germany’s dependence on exports places it in the mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (non-oil-exporting) nations that routinely generate large trade surpluses include China, Taiwan and the Netherlands.
While Germany’s exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany’s economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The “consumer” countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, runs a structural trade deficit and its total public debt is a whopping 137% of GDP.
Here’s the problem when debtor/importer eurozone members such as Greece go broke and default: Who is left standing to buy all the mercantilist exporters’ goods? Ultimately, much of those goods were purchased with debt, and when debtor nations default, the credit spigot is turned off: no more borrowing, no more money to buy Dutch, German and Chinese exports.
…click on the above link to read the rest of the article…
Petrodollar Mercantilism Explained In One Chart
Petrodollar Mercantilism Explained In One Chart
Over the past several months, with the price of crude plummeting to half where it was compared to a year ago, we have written much about the monetary reality of the Petrodollar (and more importantly, its recent disappearance), the socioeconomic implications for oil/commodity exporters, the liquidity considerations for the those who create the “recycled” currency in question, and the resultant demand for assets created by public and private entities sold by the currency creator, in the process boosting the “value” of both the commodity, the demand for the currency (usually the world’s reserve at any given moment), and the assets of the currency host.
We have explained this cycle and more importantly, what happens when this cycle goes into reverse, in “How The Petrodollar Quietly Died, And Nobody Noticed” and “The Death Of The Petrodollar Was Finally Noticed” (not to mention “Russia Just Pulled Itself Out Of The Petrodollar“).
Still, the underlying concept of how Petrodollar recycling, or as some call it, petrocurrency mercantilism works, leaves some confusion. So in order to alleviate that, here courtesy of Cult State, is a quick and simple primer that should hopefully answer all questions.
…click on the above link to read the rest of the article…
