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Why the dollar gallops – Startmag

Why the dollar gallops – Startmag
Why the dollar gallops – Startmag
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While many of the currencies are losing value, the dollar resists, maintains its hegemony and is the safe haven of the moment. The Le Monde article explains how and why

If the US dollar continues to confirm its hegemony, it is simply because there is nothing else that can replace it. What could be bought in its place? The euro, when the Old Continent is hit hard by the war in Ukraine and the energy shock? The British pound, which is no better off and less attractive after Brexit? The yen, which is in free fall, while Japan continues to keep rates at zero? The Chinese yuan, as the country plunges into a real estate crisis and represents a major geo-economic risk under the neo-Maoist government of President Xi Jinping? Or bitcoin, whose value turned out to be as volatile as a tech start-up on the Nasdaq?

Before any technical analysis on the dollar, he writes Le Monde, the United States has a number of advantages: it is not threatened by war; they are the world’s largest producer of hydrocarbons and are not strategically weakened by the current energy shock; their companies are in good financial health; the US economy is affected by inflation but appears to be further ahead in the struggle than its partners, especially towards Europe. In a context of economic, political and monetary uncertainty, the dollar is the safe haven of the moment.

In detail, the green banknote is now worth more than 1 euro, for the first time since 2002. In one year it gained 16% against the European currency. The rise is widespread: it increased by 20% against the British pound, which is at its lowest level since 1985, and by 30% against the Japanese yen, which returned to 1998 levels. It gained 8% against the yuan. Chinese. Since the beginning of the year, according to the index of Wall Street Journalthe dollar appreciated 13% against all currencies.

Rates on the rise

The most common explanation is that rates are on the rise. The Federal Reserve (Fed) has raised rates since March and now pays the short-term money at a rate above 2.25%. The cost of borrowing is likely to rise to 3% at the Fed’s late September monetary policy meeting. Today it is better to invest in the United States, where the interest rate on 10-year government bonds is 3.4%, compared to 1.73% in Germany and 0.25% in Japan.

In today’s world, foreign exchange is not only defined by purchases of Treasury securities, but increasingly by purchases of stocks and corporate bonds. If the dollar is rising, it is because investors around the world are buying US stocks, preferring Apple to Volkswagen – hit by the European crisis – or Alibaba and Tencent, taken over by the Chinese Communist Party. Corporate earnings have held up so far and the outlook, albeit revised downwards, remains better than in Europe.

From an economic point of view, the gap can be explained, among other things, by the energy shock. The United States is an oil country. When energy prices rise, the United States gets rich – as do members of the Organization of Petroleum Exporting Countries – while Europe and Asian countries (South Korea, Japan, China, India) get impoverished.

The case is particularly dramatic for European producers. According to Natixis economist Patrick Artus, to compensate for the loss of European competitiveness, the euro should fall to $ 0.80, with a further increase in inflation.

Technological advances

In reality, the explanation is much more complex. According to former US Treasury economist Marvin Barth, quoted by Wall Street Journal, the reason the dollar is strong is the United States’ ability to innovate. Technologically, it is crushing the rest of the world, as evidenced by the success of Google, Amazon, Facebook and Apple (GAFA) over the past two decades: their technological advantage allows them to invest, attract capital and raise wealth, which drives up the dollar.

Technically, US assets are considered expensive, but this is due to the fact that the companies are growing strongly. Added to this are the enormous profit margins, due to their dominant position on the market (winner takes all) and their de facto cartelization within the United States, documented by New York University economist Thomas Philippon. Until recently, US companies have been able to pass their prices on to consumers.

In the United States, the Fed and the Treasury are pursuing a de facto concerted policy of reducing price increases, raising rates and drastically reducing the budget deficit. The results are far from satisfactory, as shown by the disastrous July inflation data, but there is little doubt about the determination of the United States.

The dollar represents 40% of world trade

Nothing like it in Europe. Governments continue to fuel inflation with their budget aid programs to offset the surge in energy prices. The European Central Bank (ECB) is cautious, fearing that too sharp a rise in the cost of money could reignite the currency crises in Greece and Italy a decade ago. Until the ECB raises rates dramatically, the euro shouldn’t rebound and the dollar should stay strong.

Meanwhile, according to the International Monetary Fund, the dollar accounted for 59% of the world’s foreign exchange reserves in the first quarter, up from 71% in 1999, the year the euro was launched. And it accounts for about 40% of world trade, four times the weight of the United States. The euro was stuck at around 20%, the yen at 9%, the pound rose to around 5%, the yuan at 2.9%, while the Canadian and Australian dollars rose slightly.

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There is a decline, a slight diversification (not to the advantage of the euro), but certainly not a replacement. The first explanation is that becoming a reserve currency has many implications – you have to export your currency, and then issue many bonds, but the Eurozone ones are not homogeneous enough to act as a safe haven (German debt, which is scarce, and the Italian one, which is more abundant, are not identical).

Geopolitical risk

The creation of an alternative to the dollar is regularly expected, due to its political exploitation by Washington. The clamor for fines imposed on European companies for doing business in dollars with US embargoed countries (Iran, Sudan, etc.) hides another reality: multinationals comply with US law, such as TotalEnergies, which has withdrawn from ‘ Iran in 2018, while sanctioned former banks like BNP Paribas have a sick fear of US authorities.

The freezing of Afghanistan’s assets following the Taliban’s rise to power in Kabul in 2021 and their partial use to compensate the victims of the September 11, 2001 attacks did not cause much sensation.

The debate resumed during the war in Ukraine, with Moscow turning to China. But Russia, the world’s 11th economy, has a nominal gross domestic product equivalent to that of South Korea, while Beijing, in full retreat, has never managed to make the yuan a credible trading currency: geopolitical risk remains important, and grows with the threat of invasion of Taiwan.

These adversaries of the United States are uncoupling from the US currency: China has reduced its dollar holdings from more than 1.3 trillion in 2013 to 980 billion today, but it is far from liquidated. Russia has fallen from $ 175 billion to nearly zero since 2010. But which outside investor will take the risk of choosing the Moscow-Tehran-Beijing axis rather than the dollar sphere?

(Extract from the foreign press review by eprcomunicazione)

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The article is in Italian

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