The Dollar is here to stay πŸ‘‡ China is Back πŸ‘‡ Respect Markets

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The Dollar is here to stay πŸ‘‡ China is Back πŸ‘‡ Respect Markets

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US Dollar – In this article you’ll find:

  • 🚨 (13 UPDATES) WELLS FARGO INVESTMENT INSTITUTE – THE DOLLAR IS HIGHLY UNLIKELY TO LOSE ITS GLOBAL STATUS OVERNIGHT

    • DOLLAR’S SHARE OF INTERNATIONAL FINANCING πŸ‘‡
    • FINANCIAL MARKETS ARE UNPARALLELED πŸ‘‡
    • GLOBAL TRADE πŸ‘‡
    • TRUST IN THE DOLLAR πŸ‘‡

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  • 🚨 (8 MUST READS) CHARLES SCHWAB – CHINA IS OPENING BACK

    • CONSUMER SENTIMENT πŸ‘‡
    • US – CHINA TENSIONS πŸ‘‡

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  • 🚨 (12 UPDATES) BRIDGEWATER – RESPECT TO THE ECONOMY & MARKETSΒ 

    • RESPECT TO THE ECONOMY & MARKETS πŸ‘‡
    • PATH TO EQUILIBRIUM πŸ‘‡

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Here you can find other articles:

  1. Wiil It Change The Direction Of Federal Reserve Policy
  2. Monetary Policy Update: More Dovish or More Hawkish?
  3. Financial cracks seem arrived, and now?

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ENJOY THE ARTICLE

🚨(13 UPDATES)πŸ’² Wells Fargo Investment Institute – The dollar is highly unlikely to lose its global status overnight πŸ‘‡

US Dollar

– β€œRecent moves to denominate some oil transactions in Chinese yuan have led to a surge in reports about β€œde-dollarization” and the loss of the U.S. currency’s dominant role in global finance.”

– β€œAgreements among πŸ‡ΈπŸ‡¦ Saudi Arabia, πŸ‡¨πŸ‡³ China, and πŸ‡·πŸ‡Ί Russia to price some oil transactions in Chinese yuan exemplify this trend.”

– β€œGlobal currency status does not disappear overnight. The reason is because the U.S. dollar remains massively dominant in the β€œplumbing” of the global financial system (by which we mean its role in international trade and payments, and its dominance of borrowing by international financial institutions).”

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DOLLAR’S SHARE OF INTERNATIONAL FINANCING πŸ‘‡

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– β€œThe dollar’s share of international financing is stable at around 50% – 60% of claims and liabilities, with only the euro as a serious competitor.”

– β€œSuch dominance means powerful β€œnetwork effects2” and serious barriers to entry for any contender to world currency status. And we notice that all the main alternatives to the U.S. dollar here are developed market currencies β€” even the Chinese yuan, most often cited as the main threat to the dollar, is nowhere.”

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πŸ›οΈ FINANCIAL MARKETS ARE UNPARALLELED

US Dollar

– β€œU.S. financial markets are unparalleled globally in terms of depth, liquidity, and governance, which makes the dollar the most desirable medium of exchange for efficient β€” and, importantly, transparent β€” transactions.”

– β€œThe euro is the most obvious challenger in this regard, as noted, but it has the major drawback of being a supranational currency, with no single national authority underwriting its viability or ensuring its stability.”

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🌐 GLOBAL TRADE

US Dollar

– β€œThe Fed report cited earlier shows the dollar’s share of export financing at virtually 100% within the Americas, and even in the Asia-Pacific region at more than 70%.”

– β€œMost of the world’s trade is between U.S.-aligned developed markets and will continue to be denominated in dollars.”

– β€œIn this context, recent reports of yuan-denominated oil sales, while significant as evidence of growing geopolitical realignment, are little more than symbolic in terms of overall trade volumes.”

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πŸ’² TRUST IN THE DOLLAR

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– β€œTrust in the dollar as a store of value is in turn backed by the rule of law and robust institutions, of which the Fed – able to respond quickly and efficiently as a β€œglobal firefighter” – is a prime example.”

– β€œThe fact that the Fed now regularly opens U.S. dollar swap lines with major developed central banks in times of financial stress should be seen as a sign of U.S. institutional strength as well as of persistent global demand for dollars.”

– β€œThis is not the case for the Chinese yuan, for example, whose international role remains, at best, nascent.”

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🚨 (8 must reads) πŸ‡¨πŸ‡³ Charles Schwab – China is opening back πŸ‘‡

– β€œChina’s economic data once again exceeded expectations last week.”

– β€œTo put it in perspective, the data has been so much stronger than economist forecasts that the positive surprises are the highest since 2006, a year that marked the end of the BRIC (Brazil, Russia, India and China) era of booming growth.”

– β€œChina’s GDP growth picked up from a pace of just 0.6% in the fourth quarter to 2.2% in the first quarter. If it were reported like U.S. GDP, that is nearly 9% at an annualized rate.”

CONSUMER SENTIMENT πŸ‘‡

US Dollar

– β€œConsumer sentiment has improved but remains below pre-COVID levels, indicating opportunity for further thawing.”

– β€œThe next phase of recovery is likely a gradual return to underlying growth as consumers get more distance from the zero-COVID days, jobs and income prospects improve and confidence recovers.”

– β€œWe will be watching China’s national Golden Week holiday, which takes place in early May, for a potential boost in both travel and spending.”

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πŸ‡¨πŸ‡³ πŸ‡ΊπŸ‡Έ U.S.-CHINA TENSIONS πŸ‘‡

– β€œWhile China’s economic growth is likely to remain strong, U.S.-China tensions are unlikely to significantly lower in the near-term. But looking out past the potential flare up in May, tensions could begin to cool.”

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🚨 (12 updates) Bridgewater – RESPECT TO THE ECONOMY & MARKETS πŸ‘‡ πŸ‘‡

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– β€œLast year’s historically large and rapid tightening is starting to constrict the financial system and slow the economy.”

– β€œThe tightening cycle began roughly one year ago. It takes about that long for a tightening to have significant economic impacts, and signs are emerging that the effects are now spreading and deepening.”

– β€œThe combination of central banks raising interest rates and draining reserves with banks experiencing more constrained deposit and capital conditions and now tightening credit standards is very likely to constrain the flow of money and credit to markets and the economy, with impacts on spending and income.”

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RESPECT TO THE ECONOMY & MARKETS πŸ‘‡

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– β€œThe inflation rate is too high, the rate of nominal spending is too high to bring that down, the rate of unemployment is too low to bring wages down, and despite nominal growth being too high, the real growth rate is lower than desired.”

– β€œWith respect to the markets, bond yields are too low in relation to cash and discounted inflation rates are well below current and projected inflation rates, so there is no risk premium in bonds.”

– β€œThere is a roughly normal risk premium in equities relative to bonds based on current earnings and the current bond yield.”

– β€œBut if you get a recession as needed to get the desired inflation rate, earnings would be about 20% lower, making the earnings yield too low in relation to bonds at the same time as the bond yield is too low in relation to cash.”

US Dollar

PATH TO EQUILIBRIUM πŸ‘‡

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– β€œIn order to have a sustainable 2% inflation rate at a 2% real growth rate, you need wage growth to fall to around 2.5%.”

– β€œTo reduce wage inflation, you need to cut nominal spending and income growth in half to 3-5% and raise the unemployment rate by 2% or more.”

– β€œTo raise the unemployment rate, you need to drive nominal GDP growth materially below wage growth, compressing profit margins enough to produce about a 20% decline in earnings.”

– β€œThen central banks need to remain restrictive for about 18 months, until 2% wage growth is achieved.”

– β€œThen they can restore a normal yield curve and risk premium in bonds by cutting short-term interest rates to about 1% below bond yields.”

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.

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