See More on Facebook

Analysis, Opinion

Dollars and Sense

Andrew Sheng for Asia News Network.


Written by

Updated: August 5, 2019

Last Wednesday, the US Fed Chairman Jay Powell announced a cut in the Fed Funds rate by 25 basis points, citing slower global growth and muted inflation.   This was evidently insufficient to appease either the markets or President Trump, who openly asked for a ‘large cut’ just before the Federal Open Market Committee (FOMC) meeting.

After the announcement, he tweeted, “as usual, Powell let us down.”   Perhaps reflecting Trump’s sentiment, the US markets fell by 1% and the dollar actually strengthened slightly against other currencies.

How do we make sense of what is happening to the dollar, the most important reserve currency in the world?

The dollar is important, because it not only accounts for 44% of daily global foreign exchange trading and roughly 60% of total official foreign exchange reserves.   Because the dollar has a very liquid market both on-shore and offshore, companies and governments like to borrow in dollars, especially when the interest rates are low.   As the BIS reported, there are now $11 trillion in US$ debt that are booked offshore.  In addition, the US has net international investment position (debt) of $9.5 trillion or 47.4% of GDP at the end of 2018.

Noting that the US Federal budget deficit is running at over $1 trillion annually, bringing gross debt to an estimated 113.2% of GDP and net investment deficit of 51.4% of GDP by 2024, the IMF has warned bluntly that “the US public debt is on an unsustainable path.”

The same June 2019 IMF report card on the US economy (technically called the Article IV consultation report) also says:: “The US economy is in the longest expansion in recorded history. Unemployment is at levels not seen since the 1960s, real wages are rising, and inflationary pressures remain subdued.”    That doesn’t sound like an economy in trouble.

We all know what worries Mr. Trump.  If the economy, and especially the stock market, tanks in the run up to the November 2020 elections, then his re-election would be in trouble.   But why should the financial markets be worried?

The answer lies in the fact that there is a very close relationship between the stock market and central bank balance sheets.   Since 2015, when the Fed started to “normal” interest rates (by raising them) and reversing quantitative easing (expanding its balance sheets), the S&P500 stock market index has roughly topped and moved sideways.

Everything is relative.  During this period, both the European Central Bank and Bank of Japan have been easing, concerned about the slow growth of their economies.  The People’s Bank has eased to relieve liquidity during a period of deleveraging, in order not to over-tighten during a period of trade tensions.   Hence, if the world is slowing down overall faster than expected, monetary policy cannot be too tight to push the economies into recession territory.

But the US has now begun to politicize the dollar by increasing the rhetoric on currency manipulation, excessive surpluses and threats on using tariffs and sanctions on trading partners and rivals to try and contain its unsustainable trade deficits and debt trajectory.

This is because Trump and some in his Administration think that the dollar is overvalued, and wants lower interest rates to help alleviate the upward valuation pressure.

But the US Administration may be boxed in by its own asymmetric dollar trap.   The Fed is in charge of monetary policy (the main tool that affects the external price of the dollar), but responsibility for the exchange rate lies with the US Treasury.   If the Treasury ramps up sanctions, threats of currency manipulation and/or tariff increases, the major trading partners could easily negate these by either easier monetary policy or allowing their exchange rates to depreciate.

Exchange rates are by nature bilateral. Given the massive size of global foreign exchange markets, the US cannot unilaterally depreciate the US dollar without the help of concerted cooperation of major reserve currency central banks.  Today they may or may not cooperate since the US has threatened almost all of them on “unfair trade”, currency manipulation and the like.

The last time the dollar successfully depreciated through intervention was through the Plaza Accord of 1985, when Japan, Germany, France, UK and the US jointly intervened in the foreign exchange markets to depreciate the dollar.

This time round, the US would not be able to convene another Plaza Accord because Europe, Japan and China may not want to cooperate.   Indeed, fundamental disagreements over sanctions using the dollar on trading with Iran and other countries have caused the Europeans, China, India, Russia and others to consider non-dollar alternative payment mechanisms.   Furthermore, going forward, the growing trade surplus countries are more in Europe (particularly Germany and Netherlands) than in Japan or China, as the IMF External Sector Report 2019 showed.

Much will depend whether the Germans or Netherlands are willing to reflate fiscally, but based on the bad experience of the Chinese reflation in 2009, these fiscally conservative countries are likely to push the deficit countries (mainly the US) to address their structural imbalances rather than bear the costs of getting their own economies out of whack.

Even though the US has considerable “exhorbitant privileges” in enjoying the benefits of the dollar as the dominant reserve currency, in the long-run, this cannot be sustainable unless the US is willing to take tough pains to correct her structural savings deficit.   Even though Trump may want America First, the other global players will play for the long haul and wait for the US to plea for mutual cooperation and assistance.

There is no such thing as a free lunch.  The US must work within the global financial system through cooperation rather than coercion.  To go it alone, as what happened with Smoot-Hawley protectionist moves in the 1930s, risks sending the world into another global recession.

In this highly interconnected world, no country, not even the US can go it alone – for long.



Enjoyed this story? Share it.


Asia News Network
About the Author: Asia News Network is a regional media alliance comprising 24 media entities.

Eastern Briefings

All you need to know about Asia


Our Eastern Briefings Newsletter presents curated stories from 22 Asian newspapers from South, Southeast and Northeast Asia.

Sign up and stay updated with the latest news.



By providing us with your email address, you agree to our Privacy Policy and Terms of Service.

View Today's Newsletter Here

Analysis, Opinion

North Korea beefs up self-defense capabilities in military reorganization

The North have been making many changes ahead of talks. North Korean leader Kim Jong-un presided over a meeting of the top military decision-making body to accelerate the development of self-defense capabilities ahead of key events that will decide its national strategy, its state media reported Sunday. Discussions on ways to bolster its military capabilities through organizational restructuring and personnel reshuffle were highlighted during the third expanded meeting of the seventh central military commission of the ruling Workers’ Party. Details on what measures were discussed were not disclosed. “At the meeting, Supreme Leader Kim Jong-un


By Zaffar Abbas
December 23, 2019

Analysis, Opinion

The Chinese version

Muhammad Amir Rana asks what is the Chinese version of Islam.  TENSIONS between China and the US have escalated after the House of Representative’s Uighur Human Rights Policy Act, 2019. The move is of a piece with the allegations of many international media and human rights organisations that China is persecuting the Uighur community and violating their rights — allegations that Beijing has denied. Calling the US action a political move aimed at damaging its international image, China says it is running a deradicalisation programme to mainstream its communities. Read: Amid global outcry, China defends internment camps of minorities in Xinjiang The Chinese claim has not been verified by independent sources and mystery shrouds its deradicalisation or re-education programme. China needs to demonstra


By Asia News Network
December 16, 2019

Analysis, Opinion

India, China step up the wooing but Rajapaksa in no hurry to align Sri Lanka

President Gotabaya Rajapaksa will try to balance the competing interests of China, India in the region. The conversation in regional capitals after the emphatic win of President Gotabaya Rajapaksa in the Sri Lankan elections last month centres around a central question: Will he manage to pull a Sheikh Hasina on India and China? The reference, of course, is to the Bangladesh Prime Minister who many believe has managed to successfully push her country’s interests by balancing the competing strategic ambitions of China and India in South Asia. And Rajapaksa knows a thing or two about protecting what he believes are his country’s core interests. After all, he braved the Western world’s intense criticism – and India’s acute discomfort given its large domestic Tamil population – of the means adopted by him as Defence Minister in his brother and former President Mahinda Rajapaksa’s


By Ishan Joshi
December 12, 2019

Analysis, Opinion

Nepal moves up in Human Development Index but still lags behind in South Asia

Nepal’s human development index of 0,579 indicates that people are living longer, are more educated and have greater incomes, according to the Human Development Report. Despite global progress in tackling poverty, hunger and disease, a ‘new generation of inequalities’ indicates that many societies are not working as they should and Nepal is not an exception, according to a new human development report released on Tuesday. The old inequalities were based on access to health services and education whereas the new generation of inequalities is based on technology, education and the climate, according to the United Nations Development Programme’s Human Development Report. “Previously, we talked about wealth as a major driver for inequality. Now, countries like Nepal are in another inequality trap and that concerns


By The Kathmandu Post
December 12, 2019

Analysis, Opinion

Is polarisation driven by Hyper Information Disorder Syndrome?

In a study of Bangladesh, Brazil, Colombia, India, Indonesia, Kenya, Poland, Turkey and the US, writes ANDREW SHENG, scientists attribute populism to the rise of decisive leaders who push nationalism, demonise opponents and stir up issues that further divide societies. BANGKOK – Mass protests seem to be breaking out all over the place, from Hong Kong to Santiago, Tehran, Bolivia, Catalonia, Ecuador, France and Iraq to Lebanon.  The root causes of these protests have many local reasons, but there are common themes, such as inequality, corruption, incompetent governments, rural-urban migration, demography, anger, social media and demand for change. But underlying all these protests is the growing polarization of societies, increasingly manifested in viol


By Asia News Network
December 9, 2019

Analysis, Opinion

Rohingya Crisis Fallout

Transparency International Bangladesh has painted a grim outlook for the crisis. Bangladesh faces long-term financial, political and security challenges as Rohingya repatriation may not happen anytime soon, said Transparency International Bangladesh (TIB) Executive Director Dr Iftekharuzzaman. The fund from the international community for nearly one million Rohingyas may not sustain as no strong international initiative has been taken to oblige Myanmar for creating a conducive environment for the refugees to return soon, he said. “As a result, Bangladesh’s socio-economic instability will grow. There are risks of security at local and national levels. The crisis also creates political and diplomatic challenges for the government,” Iftekharuzzaman said. It also involves the risks of growing extremism as the people who face violence are more likely to become violent, he said at a press confere


By Daily Star
December 6, 2019