About 60% of the world’s $12.8 trillion in foreign exchange reserves are currently held in dollars, giving the United States an exorbitant privilege over other countries. And this privilege pays off: as US public debt backed by the dollar is very attractive, interest rates are lower. The US can borrow from other countries in its own currency – so if the US dollar loses value, so does the debt. US businesses can transact internationally in dollars without having to pay conversion fees.
Perhaps more importantly, in extreme circumstances the United States can cut off access to the dollar from central banks around the world, isolating and depleting its economies. Raghuram Rajan, the former governor of the Reserve Bank of India describes this power as an “economic weapon of mass destruction”.
But with great power comes great responsibility: when you use a weapon of mass destruction, even an economic one, people get scared. To protect themselves from the same fate as Russia, other countries are diversifying their investments away from the US dollar into other currencies.
This is where the country’s reserve currency status could run into trouble.
Arming the dollar, said Michael Hartnett of Bank of America strategists, could lead to its debasement. The “balkanization of global financial systems” is eroding America’s role as a reserve currency, he added.
“These observations provide insights into how the international system may evolve in the future,” warned the paper’s co-authors, Serkan Arslanalp of the IMF, Barry Eichengreen of the University of California at Berkeley, and Chima Simpson. – Bell also from the IMF.
Russia and China also hope to guide the evolution of the international system.
Saudi Arabia, meanwhile, is in talks with Beijing to accept yuan instead of dollars for Chinese oil sales.
So, is the king of the dollar about to be dethroned?
If the past two years have taught us anything, it’s that nothing is impossible. But the prospect of the United States losing this exorbitant privilege is highly unlikely.
For one, the alternatives aren’t great. China has been pushing the yuan for years and only around 3% of global transactions are conducted in this currency, compared to 40% for the dollar.
Goodbye Q1, hello Q2!
The second quarter might not be fun, but at least we’ll be prepared for it.
These challenges will continue into the second quarter. But often the devil you know is better than the devil you don’t know.
We asked analysts what they think will be the biggest headwinds this quarter and how they are preparing for them. Here’s what we found.
It’s probably best not to bet on oil and energy, as these commodities have been particularly volatile and reactive to news updates.
Interest in real estate investing is exploding, he said. “I don’t know if anything is hotter on the market right now. You have everything from single and multi-family homes to data centers to cold storage.”
When investing in the markets, look for companies that make money from spikes in inflation. Banks earn more as interest rates rise and they profit from wider spreads. Companies with low capital requirements are also good bets.
Price increase: The Federal Reserve is likely to be aggressive in raising interest rates going forward, said Liz Anne Sonders, managing director and chief investment strategist at Charles Schwab.
Typically, investors believe in a security guard known as the “Fed Put.” It’s the idea that enough market weakness will prompt the Fed to stop raising interest rates and tighten policy, and perhaps even reverse and ease rates. Because inflation is so out of control, there’s no way it’s happening this time around, Sonders said.
“Investors need to be aware of this, especially if they are more aggressive because they think the Fed won’t let the markets down,” Sonders said. They will continue to raise rates and will do so to slow economic growth. This means that the risk of recession is higher than it otherwise would be.
Monday: March U.S. Motor Vehicle Sales Released by BLS; The Main Street Sentiment Investor Movement Index released by TD Ameritrade
Tuesday: New York Fed President John Williams talks about the economy
Wednesday: FOMC minutes released at 2 p.m. ET
Thusday: Published weekly jobless claims
Friday: Eli Lilly announces its earnings before the bell