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

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

Analysis, Opinion

No safe spaces for women in Pakistan

Rafia Zakaria writes for Dawn. THAT crime lurks in the streets and corners of Karachi is not news for anyone. Precariousness and predation are the mainstay in this southern corner of the land of the pure; if you have something you are hunted and if you have nothing, you hunt. Destiny damns both, the hunters and the hunted, enacting a dystopian version of The Walking Dead, every day and every night. Karachi is, after all, judged as one of the world’s cities that are least liveable. The scars of it all are visible everywhere, on the bodies and faces of its people, on the hospitals that do not care, and the police that do not protect. This time, the dark forces that breed within the city came for a young girl. According to news reports, 20-year-old Dua Nisar Mangi was ‘committing the crime’ of walking down a city street. This was over the weekend past, and with her was a friend named Haris. It was not suppo

By Dawn
December 5, 2019

Analysis, Opinion

Pyongyang to hold party meeting ahead of year-end deadline

Kim Jong-un rides up Paektusan again, highlights self-reliance and revolutionary spirit. North Korea will hold a plenary meeting around the end of December to decide on “crucial issues,” its state-run news agency said Wednesday. On the same day, the Korean Central News Agency reported that North Korean leader Kim Jong-un rode up Paektusan on a white horse accompanied by military commanders, raising speculation that the communist regime may take more provocative military actions as the year-end deadline it set for denuclearization talks with the US quickly approaches. North Korea’s Workers’ Party of Korea announced Tuesday that the 5th Plenary Meeting of the 7th Central Committee of the WPK would convene around the end of December, Korea Central News Agency reported, “in order to discuss and decide on crucial issues in line with the needs of the development of the Korean revolution and the chan

By The Korea Herald
December 5, 2019

Analysis, Opinion

American killer

Staying away from an American policy that does not value brown and black people. CHIEF Special Warfare Operator Edward ‘Eddie’ Gallagher is a man of many sins. According to military prosecutors in the United States, Gallagher is responsible for brutally stabbing and murdering a teenage so-called Islamic State (IS) fighter, using his sniper rifle on ordinary Iraqi citizens, and boasting about racking up his ‘kills’ to others. To top it all off, Gallagher is also guilty of taking a triumphant photo of himself with the young IS fighter that he killed. Gallagher was tried and convicted by a military court earlier this year, and was to be deprived of his rank and booted out of the US Navy SEALs. President Donald Trump could not tolerate this. Despite having been told by top military and defence officials that he should leave the issue alone and allow the navy to handle what happened to Gallagher, he

By Dawn
November 28, 2019

Analysis, Opinion

China’s advanced tech presents ‘significant threat’ Share

Japanese leadership in tech called for. At the 2019 GZERO Summit held in Tokyo on Monday, politicians and experts from Japan, the United States and Europe discussed a range of pressing issues, including the absence of leadership in the world and the role Japan is expected to play in the future. Organized by Eurasia Group and supported by The Yomiuri Shimbun and other entities, the symposium was co-chaired by U.S. political scientist Ian Bremmer and Hiroaki Nakanishi, chairman of the Japan Business Federation (Keidanren). In the keynote speech titled “The End of the American Order,” Bremmer argued that the greatest threat to globalization is China creating a “separate system of Chinese technology — its own standards, and infrastructure, and supply chains — to compete with the West,” He also spoke about areas in which Japanese leadership is needed, such as mediating between the U.S. and

By The Japan News
November 20, 2019

Analysis, Opinion

Pakistan successfully conducts training launch of surface-to-surface ballistic missile

The missile is called the Shaheen-I. Pakistan on Monday conducted a successful training launch of surface-to-surface ballistic missile (SSBM) Shaheen-I, Inter-Services Public Relations (ISPR) said. According to a press release issued by the ISPR, the launch was conducted as part of a training exercise “aimed at testing the operational readiness of Army Strategic Forces Command”. The director general Strategic Plans Division, commander Army Strategic Forces Command, NESCOM chairman, senior officers from the Strategic Plans Division, Army Strategic Forces Command, scientists and engineers witnessed the training launch. “Troops displayed a high standard of proficiency in handling and operating the potent weapon system, ensuring Pakistan’s credible minimum deterrence,” ISPR stated. As per the military’s media wing, the Shaheen-I SSBM is capable of delivering al

By Dawn
November 19, 2019