Banks (Page 33)

Donald Trump, the candidate for president of the United States, stepped up his America First campaign earlier this month by promising to impose 100 % tariffs on goods from any country that deviates from the dollar. &nbsp,

Trump did not explain to his supporters that the dollar-protection measure did cause American households to suffer as some consumer goods are likely to cost more than double. Around 70 % of products sold at Walmart and Target are sourced from China, the country at the forefront of de-dollarization.

Trump made his announcement on the day of the very anticipated monthly BRICS conference, scheduled for October 22-24 in Kazan, Russia. The appointment may make an announcement regarding a strategy for the creation of a viable alternative to the current dollar-centric global financial system.

Although more information are still being provided, some observers anticipate that the conference will make an announcement regarding a multicurrency payment system. Some BRICS watchers even anticipate the release of a blueprint for a trading currency with gold backing.

Bretton Woods

For a number of reasons, the development of an alternative to the current money method would be traditional. It may mark the initial legitimate attempt to depart from the Bretton Woods Agreement of 1944, which established the post global financial system.

The money was subject to the predetermined price of gold under Bretton Woods, while all other currencies were fixed at the money. At the so-called golden windows, countries with dollar-denominated trade deficits could exchange their money for gold with the US central banks.

Financial security was achieved by the money system, but almost all of it was controlled by the US. US businesses evolved into the hubs of international commerce. A Chinese company that purchased products from India had to purchase dollars to spend its Indian dealer. The US was able to impose any man, business, or nation on the global financial system thanks to the unified system.

When US President Richard Nixon decoupled the dollar from silver in 1971, Bretton Woods began to unravel. The US chose to close the silver screen rather than compromise its business, efficiently defaulting on its Bretton Woods responsibility, as the country faced rising trade deficits.

The choice had big implications. The US government lost its fiscal discipline after being freed from the restrictions imposed by the gold standard and embarked on a decades-long spending binge. From 1971 to 2024, the US national debt grew from$ 400 billion to$ 35 trillion.

A growing number of prominent economists and business officials have sounded the alarm because servicing the national debt has grown to be the most important line item on the US federal budget, even more so than yearly defence spending. Tesla CEO Elon Musk just warned:” At current levels of government saving, America is in the fast lane to bankruptcy”.

More precisely, the US may immediately work out of lenders willing to buy its debts. In recent years, China has sold US Treasuries worth hundreds of billions, and foreign investors have recently become online retailers of US loan. ( The commonly used term “printing money” actually means issuing debt. )

BRICS versus G7

Even without the US incurring its huge debt, continuous de-dollarization is obvious. The National share of the world economy is rapidly declining.

In 2016, BRICS states overtook the G7 in combined GDP. The group now accounts for 35 % of the world’s output, compared to the G7’s 30 %. China contributes almost twice as much to the world’s industrial output as China alone, nearly twice the US.

There are many different themes, but it’s challenging to design a financial or monetary structures for nations as varied as the BRICS members. Sergei Ryabkov, the deputy foreign secretary of the Russian Federation, just demanded a financial unit akin to the Western Currency Unit (ECU), the euro’s precursor.

The ECU was conceived in 1979 in response to Nixon’s decision to close the silver screen. The German dollar started to shift wildly as it was no more pegged to gold. Therefore, the ECU established a common unit of account that stabilized forex markets.

The “bancor,” a dollar system that economist John Maynard Keynes suggested during the Bretton Woods Conference, is another example of how things are being used.

The bancor was conceived by Keynes as a global unit of account tied to a pantheon of essential goods like oil and grains. This would guarantee that the bancor’s value was determined by real financial resources more than fluctuating national economies.

In an effort to promote healthy global trade, Keynes even suggested sanctions for nations with prolonged trade surpluses or deficits. The US criticized the bancor as troublesome and preventing free business. But today’s severe imbalances—particularly the US’s huge trade deficit with China—validate Keynes’s vision.

An mBridge not too far

China is working with a number of other nations on mBridge, a blockchain-based platform that supports fiscal transactions in several currencies, despite the possibility of a BRICS frequent money in the near future.

Simultaneously developed by the central bankers of China, Thailand, the UAE and Hong Kong, mBridge helps fast, peer-to-peer deals without third-party presence. According to reports, the platform supports Central Bank Digital Currencies ( CBDC ) and uses blockchain technology that is similar to Ethereum.

Cross-border business finance is made more cost-effective and affordable by the mBridge. A Thai firm may exchange rice for a businessman in Singapore in Thai ringgit or any other agreed-upon money. Transactions are quick and do n’t involve third parties. In mBridge, institutions of participating nations are the nodes in the network.

BRICS now comprises nine countries, the initial five members of Brazil, Russia, India, China and South Africa plus Egypt, Ethiopia, Iran and the UAE. Some have speculated that the gathering might eventually expand to include more than 100 nations, while over 40 extra nations have expressed interest in joining.

However, the BRICS surprised the world last month by announcing that it would quit accepting new people for a short time. No justification was given, but the ice might be related to the difficulty and awareness of developing a new financial infrastructure and its possible worldwide influence.

BRICS has plenty of reasons to tread carefully. Global financial markets could become unstable if only a new monetary system’s future roadmap was announced. Obviously, the group will want to avoid accusations of triggering a financial crisis.

The direction BRICS will take from here will depend on several factors. How aggressively will the US defend the dollar? How will the US address the country’s growing trade and debt problems? What will the country’s increasingly dysfunctional political system do next?

While Trump’s pledge to sanction de-dollarizing nations could be campaign rhetoric, an escalation of America’s sanctions war could trigger a financial reset in response.

BRICS might decide to establish a currency unit that is partially supported by gold and other natural resources, including oil, minerals, and metals. Given that it controls a sizable portion of the world’s natural resources and is able to influence global prices, the group has considerable leverage.

One way to tell BRICS is gearing up for a similar financial reset is its unheard of hoard of gold. BRICS members have purchased gold at record prices in the past two years. Following a financial or monetary crisis, the monetary metal has historically been used to rebalance currencies.

To be sure, a transformation of the now 80-year-old global financial system is inevitable. In a neo-colonial transformation of the British Empire, Bretton Woods modernized the banking system and moved London to New York as the seat of power.

On the other hand, the BRICS will likely work from the ground up to create a new financial system that is based on the demographic and economic realities of the 21st century, rather than the 20th.

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If and when anticipated Federal Reserve rate reduces fail to undermine the US dollars, the upside-down nature of the global economy could accomplish new variations.

Granted, there are as many reasons as there are for the global reserve currency to get plunging.

They include: the US federal loan topping US$ 35 trillion, slowing economic development, the Fed about to relax its 2022-2023 tightening period, powerful political fragmentation imperiling Washington’s credit score, and efforts to reduce the dollar’s omnipotence are gaining traction.

All eyes are on the activities by – and impulses from – Fed Chairman Jerome Powell‘s group, which is commonly expected to begin slashing prices at this year’s September 17-18 plan meeting.

Yet even though” King Dollar” is losing some brightness, it remains stubbornly strong. One great reason: the global framework.

Isabella Rosenberg, a money analyst at Goldman Sachs, claims that making up a dollar performance using just one variable — the direction of Fed policy in this instance — is not typically extremely effective. ” Plainly, the comparative landscape for FX matters little more”.

In response to that situation, many other major central banks around the world are easing, also, keeping the dollar’s attractiveness in relation to other currencies. They include the European Central Bank, the&nbsp, Bank of England, People’s Bank of China and possible the Bank of Korea in the months ahead.

Rosenberg points out that “if most central bankers are easing up, we can anticipate that that will lessen the impact of Fed easing on the money.” We also believe that other central banks would relieve plan more if the Fed gave them the opportunity to do so, despite the market’s pressure allowing for a quicker Fed tilt.

However, it’s not obvious that the ongoing strength of the dollar is good news for the global financial system in the year 2025. The economy’s “wrecking&nbsp, game” tendencies have been shaking up markets in recent years. It’s hoovered up enormous waves of international capital, disadvantaging emerging markets in specific. &nbsp,

Gary Ross, chief executive officer of Black Gold Investors LLC, has been warning since as far back as mid-2022 that “upward pressure on the money is a&nbsp, wrecking&nbsp, ball&nbsp, for assets”.

The dangers of this wrecking basketball dynamic are “particularly severe in emerging areas” because” they rely heavily on assets and have debt in money,” according to Tom Dunleavy, a partner at MV Capital.

Oil, as well as most trade and debt, are still priced in dollars. And, he says,” the denominator of everything is going up”.

Regardless of the dubious logic behind it, the more crowded a continued-dollar-strength trade becomes, the bigger the global fallout when depressed punters flee for the exits. &nbsp,

Washington’s political polarization could lead to unexpected risks that would restore the laws of financial gravity. That’s especially true as former US President Donald Trump campaigns for a second term.

The insurrection&nbsp, Trump fomented on&nbsp, January&nbsp, 6, 2021, dragged Washington’s credit rating down with it. When Fitch Ratings last year yanked away Washington’s AAA status, it cited the insurrection as a key variable.

As Fitch put it, the chaos on&nbsp, January&nbsp, 6, 2021, was a “reflection of the deterioration in governance” imperiling US finances. The US national debt is now twice the size of China’s gross domestic product, imperiling Washington’s last remaining AAA rating from Moody’s Investors Service.

The Tokyo piece of the puzzle is quite different, of course. Since 1999, the Bank of Japan has been working to normalize short-term rates, which have been near zero. On July 31, the BOJ raised rates to 0.25 %, the highest since 2008.

That sent the yen surging 8.5 % versus the dollar. However, since then, the team led by BOJ Governor Kazuo Ueda has seen a lot of data points that could prevent it from tightening any more anytime soon.

One was the initial$ 6.5 trillion rout in global asset markets. Another: agitated Tokyo lawmakers concerned that the central bank is playing too much. Japanese wages are n’t surging in 2024 as hoped. &nbsp, Lawmakers also worry that deflation has n’t yet been officially defeated.

Recent “data confirm that Japan’s economy is not yet out of the woods”, says&nbsp, Stefan&nbsp, Angrick, economist at Moody’s Analytics. The second-quarter rebound, which has been negatively revised, comes in response to a number of subpar GDP reports that showed output dropping for the majority of the year.

And, Angrick adds,” the headwinds facing the economy are substantial. Before the end of the year, exports are struggling and unlikely to significantly improve. Household finances are stretched”.

Monthly cash earnings, Angrick notes,” saw a big jump this summer, but this was driven largely by stronger bonus payments, so we look for more evidence that wage growth will stick. Despite the disparate data, the BOJ seems determined to tighten monetary policy. At best, further rate hikes will be an added drag on growth. At worst, they could precipitate a broader downturn”.

The dollar would regain some of the ground lost against the yen in recent weeks if the BOJ stops halting rate increases for the moment.

Though contrarian for sure, Goldman Sachs is n’t a complete outlier. Count Daragh Maher, an economist at HSBC Securities, among those who think the dollar’s strength could prove impervious to Powell’s pivot toward easing. According to Maher, the “exceptionalism theme” that surrounds the US economy still “feels like it has got its arms around the dollar.”

It’s no coincidence that the dollar is at its highest levels since the dot-com economy of the late 1990s, according to Joe Brusuelas, chief economist at advisory firm RSM. The dollar has risen despite threats of a trade war, the pandemic, and the government funding standoffs, which we credit to the US’s renewed leadership in global affairs and the strength and innovation of its economy.

It’s also a coincidence that the major US trading partners included in the dollar index also happen to be the major international financial centers, according to Brusuelas. And it’s the rising demand for US long-term securities from those institutions that most accurately reflects the dollar’s long-term strength. Anyone can make an investment in a Treasury bond or a corporate bond of the highest caliber in the US.

That liquidity is important in a time when the global economy is in great uncertainty.

Kathleen Brooks, research director at advisory XTB, says that “without a doubt, the No 1 driver of the dollar is going to be relative interest rate differentials”. She notes that “any scaling back of bets on Fed rate cuts is likely to give the dollar some breathing room.”

The election and the Fed’s rate increase may be at odds with one another. On the one hand, US inflation continues to be slightly higher than the Fed might prefer.

Although the consumer price index increased by only 2.5 % year over year in August 2024, which is the lowest level since February 2021, inflation continues to be stubbornly high in housing and other important industries.

” Overall, inflation appears to have been successfully tamed but, with housing inflation still refusing to moderate as quickly as hoped, it has n’t been completely vanquished”, says Paul Ashworth, chief North America economist at Capital Economics.

Some Fed officials worry that Joe Biden’s Democrats might be aided by the proposed rate increases ahead of the November 5 election by using them as leverage. If traders begin looking at US finances in the run-up to the contest, the dollar could be affected by this.

While Vice President Kamala Harris ‘ popularity appears to have shifted, the growing US federal deficit is likely to be the subject of discussion regardless of who wins the White House, according to analysts at UBS in a recent report.

According to UBS,” Indeed,” the Congressional Budget Office recently predicted that US interest costs will overshadow defense spending this year. Fears about the US fiscal deficit’s size, in our opinion, will have a long-term impact on the US dollar. We anticipate the US dollar to maintain pressure, according to UBS.

Brooks, though, is less worried that politics will trump interest-rate differentials. ” I do n’t think the election is a key factor in the FX market yet”, she says. ” We’re at this precipice of monetary-policy change and that’s so much more important than politics for the market at the moment”.

For now, Michael Zezas, Morgan Stanley’s head of US public policy research, argues that” King dollar does n’t really have any challengers”. China’s yuan, he argues, is n’t liquid enough to challenge the dollar, while cryptocurrencies are n’t ready for anything approaching global prime time.

Yet hubris is its own danger. That’s particularly so as Brazil, Russia, India, &nbsp, China&nbsp, and&nbsp, South&nbsp, Africa, the BRICS, lead efforts among Gulf region and&nbsp, Global&nbsp, South&nbsp, nations to dethrone the dollar. These de-dollarization efforts are making notable progress.

In Beijing, Xi Jinping’s “yuanization” push is gaining traction. In March, China’s currency hit a record high of 47 % of global payments by value. Last year, the yuan topped the yen as the currency with the fourth-largest share in international payments, according to financial messaging service&nbsp, SWIFT.

However, many people’s perceptions may not be as straightforward as they think about how those changes affect the dollar. Rumors of a predictable cause-and-effect decline in the dollar may prove to be exaggerated as the Fed finally pulls the trigger on rate cuts.

Follow William Pesek on X @WilliamPesek

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