If the Dollar No Longer Rules the World; global reserve currency
Chaotic markets threatened to trigger a full-blown crisis
For a good few hours on April 9th, disaster beckoned.
Share prices had been falling for weeks. Then the market for American Treasury bonds—normally among the safest assets available—started convulsing, too.
The failure of both risky and supposedly safe assets at once threatened to destabilise the financial system itself.
It would be reckless to assume the shocks are over, or that foreign investors’ faith in American assets, now shaken, can be magically restored.
How much more can the system take before something really does break?
The Economist 10 April 2025
The concern now among bankers and hedge fund managers is that something, somewhere could break
It is already clear that hedge funds and other investors are in pain. Once that happens, self-reinforcing doom loops can emerge.
Investors are dumping what they can sell, not necessarily what they want to sell, to try to plug leaks elsewhere
When risky assets fall in price, that’s one thing. But when the safe assets take a hit, you really are in trouble.
Even obscure investment houses can wreak significant damage.
The entire financial world waits for a pivot from Trump.
Any further declines in safe assets are the real distress flare to look out for.
Katie Martin Financial Times 7 April 2025
https://www.ft.com/content/c2b4129c-d58c-4c9e-9aee-6f2e10c25785
Tillbaka till Rolfs länktips 11 april 2025
https://englundmacro.blogspot.com/2025/04/rolfs-lanktips-11-april-2025.html
In the turmoil touched off by a trade war, the U.S. is no longer seen as safe
Investors worldwide flocked to “American exceptionalism” by buying its assets. The U.S. is still exceptional, but it is also less predictable, more antagonistic, and more isolated. For foreign investors, that makes it less safe.
Technical factors can’t explain why bonds and the dollar began behaving strangely weeks ago. The more fundamental explanation is that global investors might be changing how they view the U.S.
The dollar has long been the world’s reserve currency. The dollar’s reserve status makes it artificially strong, which results in exports being more expensive and imports cheaper, contributing to the U.S. trade deficit.
As of last June, foreigners held $7 trillion of Treasury bonds (half by official investors such as central banks). That is about a third of the total held by the public.
The federal budget deficit is running at around $2 trillion a year, or 7% of gross domestic product, and Senate Republicans just passed a budget resolution that would continue outsize deficits for the foreseeable future.
So the U.S. needs foreigners to keep rolling over the bonds they hold, and buying new ones. Even a small pullback would cause yields to jump.
Greg Ip Wall Street Journal 10 April 2025
https://www.wsj.com/economy/trade/us-dollar-treasury-bonds-trade-war-028e8765
If you’ve been investing your savings for the past 15 years, there is a situation you’ve hardly ever encountered: the U.S. dollar getting structurally weaker.
Even excluding the Magnificent Seven, Americans who bought the rest of the S&P 500 15 years ago earned a total return of around 380%.
Europeans who did the same, unhedged, earned about 490%—thanks to the dollar’s more than 20% gain against the euro
Two forces helped drive this.
One was the fracking boom, which made the U.S. largely energy self-sufficient, cutting corporate costs and turning the dollar into a kind of “petrocurrency.”
Investors learned in 2014 the counterintuitive lesson that the U.S. economy may actually suffer when crude prices nosedive, and benefit when they rise.
The other factor was that U.S. consumer spending was unrelenting, even at times when gas-pump prices increased.
For years, it has been powered by government deficit spending, a tech sector exporting services globally at scale, and the wealth effects from a booming stock market.
Wall Street Journal 6 April 2025
https://www.wsj.com/finance/investing/us-currency-stock-market-investor-impact-0f27a6fe
We will drill, baby, drill; but shale output peaked in November 2023
https://englundmacro.blogspot.com/2025/01/we-will-drill-baby-drill-shale-output.html
We got a problem... 2024 the US trade deficit increased to $918 billion; 9.997 miljarder kronor
https://englundmacro.blogspot.com/2025/02/det-ar-dollarn-bakom-allt-monetary.html
Persistent trade deficits are an inescapable aspect of issuing the global reserve currency
https://englundmacro.blogspot.com/2025/04/persistent-trade-deficits-are.html
It is the dollar-based global financial system that is the real source of America’s hegemonic power
https://englundmacro.blogspot.com/2025/02/it-is-dollar-based-global-financial.html
Tillbaka till Rolfs länktips 6 april 2025
https://englundmacro.blogspot.com/2025/04/rolfs-lanktips-6-april-2025.html
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