InvestMacro

By Dan Steinbock

The pressure toward the diversification of world currency reserves is longstanding. It intensified after 2008, but has escalated since 2022. It is a prime topic in the next BRICS Summit that’s likely to further intensify the trend.

In 2016, US Treasury Secretary Jack Lew cautioned that “the more we condition the use of the dollar and our financial system on adherence to US foreign policy, the more the risk of migration to other currencies and other financial systems in the medium-term grows.”

Both the Trump and Biden administrations have ignored Lew’s warning. One consequence has been the Global South’s rising interest in the BRICS, which will have its next, highly-anticipated summit in South Africa in late August.

A key topic in Johannesburg will be the BRICS quest to develop alternative payment systems to US dollar.

Risks of dollar monopoly   

In May – oddly, amid the US banking crisis – economist Paul Krugman attributed the “de-dollarization” brouhaha to crypto-cultists and Putin’s sympathizers, as if the trend was nothing but a misguided anti-patriotic melee.

However, as Krugman noted, much of world trade remains invoiced and settled in U.S. dollars; many banks based outside the United States nonetheless offer dollar-denominated deposits; many non-U.S. corporations borrow in dollars; central banks hold a large share of their reserves in dollar assets; and so on. The assumption was that, a bit like diamond, US dollar is forever. In reality, no dominant reserve currency has had an indefinite life-span.

What Krugman failed to understand is that it is precisely the current coercive monopoly of the US dollar – the world’s disproportionate dependency on US dollar in trade invoicing and settlement, and the dollar reliance by non-US corporate and financial giants, and dollar’s high share in central banks’ reserves – that increasingly worries not just the Global South, but an increasing number of major economies in the West.

When the dollar is weaponized by the US foreign policy in the name of international community but without the broad support of international consensus, it puts trade invoicing and settlement, foreign corporates, financials and central bank reserves at risk.

True, recently US Secretary of Treasury Janet Yellen said there’s still no alternative to the dollar-based monetary system. Then again, not so long ago, she also warned about a catastrophic scenario if Washington failed to agree on a (still another) new debt limit. Similarly, the British, too, touted the blessings of their sterling pound until 1914. But that primacy ended with the overstretch of the UK economy after 1945.

The early 21^st century has its unique characteristics, but it won’t be that different.

Advantages of diversification

How is the BRICS contributing to diversification? Thanks to its organizational flexibility, the bloc makes possible unilateral, bilateral and multilateral measures. Analytically, these range from gradual reforms to more unilateral individual measures. These, in turn, are driven by the original BRICS founder economies (Brazil, Russia, India and China), the new aspiring members and the coalition partners who share its vision and are considering membership as well.

Some 22 countries have formally applied to join the group, while an equal number of states “have been informally asking about becoming BRICS members,” according to Anil Sooklal, South Africa’s ambassador-at-large responsible for ties with Asia and the BRICS. Reportedly, countries looking to join the bloc include Argentina, Iran, Saudi Arabia, and the United Arab Emirates.

Indeed, the rising number of populous and large emerging economies make possible the kind of “network effects” and “positive spillovers” that will be critical to launch the new critical infrastructure for the proposed alternative global financial system.

However, what the BRICS offer is not simple de-dollarization. The goal is not to eliminate the dollar, which is typically the depiction by the critics and political adversaries of the BRICS, particularly in the West. At the eve of the Ukraine conflict, Atlantic Council characterized Russia and China as “partners in de-dollarization.” That, in turn, was portrayed as “an alternative to the US-dominated SWIFT” [the currently dominant payment system]. Touted widely in the West, the cooperation of Russia and China is understood as a de jure alliance, and de-dollarization as a ploy for dollar substitution.

The realities are a bit less scandalous and more nuanced. The BRICS have little to do with rogue states seeking covertly to subvert international order. Rather, like asset managers who seek to maintain appropriate diversification in their portfolios, the BRICS’ strategic objective is diversify and recalibrate rather than simple de-dollarization.

From Keynes’s Bancor to the BRICS’ currency diversification

The skeptics say that the dollar has been buried many times before. Why should it die this time? But who says it would have to die. The more, the merrier. Most BRICS economies still rely significantly on the US dollar, whereas those that have been sanctioned by the US and/or its allies have significantly reduced their dollar reserves, often opting for gold instead.

What the major BRIC economies seek for is a more diversified global currency regime. The present path is untenable. If it is not remedied gradually and over time, it will change through a major world crisis, disruptively. The BRICS goal is not to replace the dollar. Rather, it is to diversify the monetary system so that it would better reflect today’s world economy.

In historical view, it’s far from a new idea. John Maynard Keynes made a similar argument for the proposed supra-national currency bancor (the name was inspired by the French banque, “bank gold”) in Bretton Woods in 1944. But the idea was torpedoed by the U.S. negotiators, who wanted to replace the UK pound with the dollar as the world’s major reserve currency. However, Keynes cautioned that the dollar primacy would result in great uncertainty and volatility following the reconstruction and recovery of Western Europe and other major economies.

That’s what ensued in 1971, when President Nixon ended unilaterally the convertibility of the dollar to gold. Though introduced as a temporary measure, it made U.S. dollar a permanently floating fiat money. As gold no longer offered a yardstick for value, the perception of value replaced value itself. The consequent price shock reverberated across the world. With the twin oil crises, it was followed by the quadrupling of oil prices, then runaway inflation and stagflation, and eventually record-high US interest rates and massive rearmament drives.

Rise of complementary institutions

In geopolitics, the U.S. has continued to lean on major Western economies and Japan, but in international economy it refused to renounce the exorbitant privilege. As a net consequence, the dollar monopoly contributed to asset bubbles in the 1980s, early ‘90s, early 2000s and finally in 2008. Amid the Great Recession, China’s central bank governor Zhou Xiaochuan revived the idea and urged major Western economies to “reform the international monetary system.”

Great pledges were made in Brussels, Washington and Tokyo, but nothing much happened. Hence, the efforts at complementary development institutions and critical infrastructure, including the BRICS New Development Bank (NBD), the Asian Infrastructure Investment Bank (AIIB), the Bridge and Road Initiative (BRICS), and the quest for new currency arrangements.

The BRICS do not want to subvert the world order. Rather, they seek to foster one vis-à-vis diversification. Nonetheless, global currency arrangements must not just the interests of Americans who account for 4.1 percent of the world population. It must also reflect the aspirations of the multipolar world economy in which global growth prospects are driven by the large emerging economies.

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/

The original commentary was released by China-US Focus on Aug. 4, 2023. See also Dr Steinbock’s interview by Berliner Zeitung “Wollen die Brics den Dollar ersetzen? Das sagt ein Wirtschaftsexperte dazu” on July 27, 2023. Berliner Zeitung is one of the leading German dailies.

By ForexTime 

Here are some Swiss Franc facts that may surprise you:

1. CHF is best-performing G10 currency vs. USD so far this year
2. SNB uses Swiss Franc to help achieve inflation target
3. Swiss Franc is a safe haven currency
4. USDCHF sees 55% larger-than-average moves on US CPI days so far in 2023
5. Blomberg FX model: USDCHF to trade within 0.8645 – 0.8865 this week

1) CHF is the best-performing G10 currency so far in 2023

USDCHF has a year-to-date decline of more than 5% at the time of writing (stronger CHF + weaker USD = lower USDCHF).

The Swiss Franc (CHF) has overtaken the British Pound for the current title, after battling it out for most of July, with the former also boasting of an advance against all of its G10 peers for the year-to-date period:

2) The Swiss National Bank (SNB) has been allowing CHF to strengthen

This central bank uses the CHF exchange rate as a major tool for controlling inflation.

A stronger CHF means cheaper imports, and also more receipts from its exports, hence Switzerland’s consistent trade surplus.

Fun fact: Switzerland’s watch exports have grown by double-digits year-on-year (>10%) in 4 out of the first six months of 2023.

After over a decade of limiting the Swiss Franc’s strength, the SNB finally signalled in November 2022 that it’s ready to sell foreign currencies and let the CHF strengthen.

NOTE: The SNB exchanges foreign currencies back into Swiss Francs, which in turn drives up the value of the latter.

Furthermore, the SNB has maintained its willingness to keep hiking rates.

Such hawkish rhetoric comes despite inflation already falling within the central bank’s 0% – 2% CPI target range (Switzerland’s July CPI = 1.6%).

However, the SNB appears concerned that inflation may make a comeback later this year, hence expectations for another rate hike.

At the time of writing, overnight index swaps are pointing to a 60% chance that the SNB could hike by a further 25-basis points before 2023 ends.

NOTE: SNB only makes a rate decision once every quarter. Its next rate decision is due on September 21st.

Recall that, a currency tends to strengthen as markets continue to expect interest rates in that country to climb higher.

Hence, such expectations have aided the Swiss Franc to reach its strongest level against the US dollar in about 8 years.

Back in mid-July 2023, USDCHF dipped below 0.8600 for the first time since the SNB lifted the Swiss Franc’s cap against the euro back in 2015 which saw CHF skyrocketing (and USDCHF plummeting).

3) Swiss Franc is a safe haven currency

A safe haven is an asset that investors buy up with hopes of preserving their wealth in times of heightened fear and great uncertainty.

Consider how the Swiss Franc gained by 2.86% versus the US dollar for the month of March 2023, amid the banking turmoil in the United States as well as Switzerland.

Currently, with markets fearing a recession, that has also helped drive up the value of the safe haven Swiss Franc.

4) USDCHF sees 55% bigger one-day move on day of US inflation data release

So far in 2023, USDCHF tends to move by about 56 pips (between its highest to its lowest intraday price) on average within a single trading day.

However, that average intraday move soars up to 87 pips on the days that the US consumer price index (CPI) is released.

That’s a 55% increase in volatility!

Hence, brace for heightened volatility when the US CPI due is released this Thursday, August 10th! ​​

Currently, economists are forecasting the following numbers for the upcoming US CPI report:

• CPI month-on-month (July 2023 vs. June 2023) = 0.2%
• Core CPI (excluding more volatile food and energy prices) month-on-month = 0.2%
• CPI year-on-year (July 2023 vs. July 2022) = 3.3% (a slight uptick from June’s 3% year-on-year increase)
• Core CPI year-on-year = 4.8% (matching June’s core CPI y/y number of 4.8%)

Potential scenarios:

• A set of CPI numbers that show US inflation is moderating further, which in turn allows the Fed to back away from a September rate hike, may drag USDCHF lower on the weaker US follar.
• Higher-than-expected CPI readings, which stoke fears of a resurgence in inflation that forces the Fed into yet another rate hike next month, may translate into a stronger US dollar and a higher USDCHF.

BONUS FACTS:

• At the lower-than-expected US CPI release on July 12th, USDCHF registered an intraday move of 139 pips!
• That was its biggest one-day DROP in % terms so far in 2023, and also its 3rd largest single-day move (both up and down) in percentage terms of the year so far.

In other words, if recent history is to be a guide, brace for a volatile USDCHF on US CPI release day.

5) USDCHF likeliest to trade within 0.8645 – 0.8865 this week.

According to Bloomberg’s FX model, there’s a 72% chance that USDCHF trades within the above-mentioned range over the next one-week period.

Here are some further key levels of interest for the immediate term:

POTENTIAL SUPPORT:

• 21-day simple moving average
• 0.864 – 0.866 region = lower bound of Bloomberg FX model forecast / area for choppy July price action
• 0.8600 = psychologically-important level

POTENTIAL RESISTANCE:

• 0.8800 = psychologically-important number
• 0.8820 = early-May low
• 0.886 region = upper limit of Bloomberg FX model forecast / 50-day simple moving average / upper bound of USDCHF downtrend since November 2022

• 0.89014 = June 2023 low

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

By George Prior 

The surprise US credit rating downgrade will trigger short-term volatility for the dollar – but more importantly, will speed-up the long-term decline of the US and global reserve currency, warns the CEO of one of the world’s largest independent financial advisory and asset management companies.

The warning from Nigel Green of deVere Group comes as rating agency Fitch downgraded the US government’s top credit rating on Tuesday to AA+ from AAA.

Fitch cited fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that puts at risk the government’s ability to pay its bills.

The deVere CEO says: “Many US analysts are predicting that this surprise downgrade of the world’s largest economy’s credit rating will only trigger short term volatility for the dollar – and the US and global reserve currency wobbled on the news, as should have been expected.

“However, as this is the second major rating agency (after Standard & Poor’s) to strip the US of its triple-A rating, there are serious, legitimate questions to be asked about the long-term trajectory of the dollar.”

He continues: “No one can predict the future, but history unequivocally teaches us that nothing lasts forever. Global reserve currencies have come and gone before.  It will happen again.

“Indeed, I believe that we are witnessing in real-time the world beginning to shift away from a dollar-dominated financial system.

“Among other reasons, this is because astronomic levels of debt, and the enormous amount of desperate money printing to monetise these debts, have caused the considerable drop in the long-term value of the currency.”

Earlier this year, Nigel Green was one of the first voices to flag the threat to the US dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trades.

He said one of the most significant, but under-reported, outcomes of a three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements.

Separately, two deals, announced a week earlier, will see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity. It was reported that Saudi Arabia was also in talks with Beijing to settle with the yuan instead of the dollar.

“It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan, that would lead to an enormous shift in the global economic system.

“Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars. This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars in order to do so.

“If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.”

This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets.

Investors should begin to consider hedging against a declining dollar. Diversification across different currencies, investing in non-US assets, using derivatives, and investing in commodities and real estate are all considered effective ways to hedge against potential USD volatility.

The deVere CEO concludes: “While the latest report from Fitch will have a minimal impact, two major credit downgrades, industrial-scale money printing to monetise astronomic debts, and rivals like China and their allies looking to take the financial crown from the US, can be expected to speed-up the long-term decline of the dollar.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.

By ForexTime 

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com