Commentary on Political Economy

Tuesday, 28 July 2020

It is inadvisable to throw stones at every barking dog ~ but in the case of the Sinophile imbecile Stephen Roche at Harvard , we simply had to make an exception.   Dogged bastards like Roche should know that the temporary descent of the greenback over the last couple of weeks (not matched by a comparative rise in the reminding in any case) is simply a reflex of the risk~on dynamic of financial markets.  Far from harming the greenback as the only real hard currency on this planet (but then Roche probably lives in a corner of Andromeda ), a lower dollar makes US exports and Treasury and stock purchases more attractive  - which is exactly what is happening. Roche could not understand ~ his flimsy brain doesn't stretch that far ~ that it takes a single fusillade in the South China Sea or in the Strait of Ormuz for all the capital in the world ~ including and especially that of Chinese apostate rats - to seek refuge in the only capitalist superpower that counts and that will remain so for the next hundred years at least - the US of A!

The Euro’s Ascent Won’t Knock the Dollar Off Its Perch

Currency traders have made money betting that the euro zone’s pandemic response would benefit the common currency.
Don’t count me out just yet.
Don’t count me out just yet. Photographer: Priscila Zambotto/Moment RF
With the euro surging to its highest level for six years, based on the European Central Bank’s trade-weighted index, the doom-mongers predicting the dollar’s demise as the world’s reserve currency of choice have started chorusing once more. As usual, they will be proved wrong.
Traders who’ve been speculating that the common currency would benefit from the euro zone’s superior pandemic response, at least when compared with the U.S., have been rewarded for their faith. The euro is up by 4.3% against the dollar this year, and is at its strongest since 2014 versus a basket of the currencies of the bloc’s 19 biggest trading partners.

Higher and Higher

The euro is at its strongest since 2014 on a trade-weighted basis
Source: ECB via Bloomberg
Moreover, those bets continue to accumulate. Figures compiled by the Commodity Futures Trading Commission show net positions designed to profit from euro strength have risen steadily since flipping positive in March, and are at their most bullish since April 2018.

Euro Bulls

Bullish bets on the euro in the futures market are at their highest since April 2018
Source: CFTC via Bloomberg
On a two-way trade in the midst of a pandemic, the data on both infection rates and deaths from the coronavirus suggest it makes sense to back the euro versus the dollar, given the U.S. administration’s woeful performance in curbing its spread. Add in the U.S.’s worsening relationship with China and the prospect of political turmoil around the November presidential election, and it’s easy to see why the greenback is down to its weakest position against 10 major peers since September 2018.
But weighing the likely speeds at which countries will emerge from lockdown and assaying the latest tit-for-tat embassy closures tells us nothing about the long-term likelihood of the dollar losing its status as the world’s preferred currency. Global central banks have about $11 trillion of reserves, according to the International Monetary Fund. More than 60% is in dollars, amounting to $6.8 trillion, compared with about 20% in euros, 6% in yen and less than 5% in pounds. Moreover, a survey of more than 50 central banks published last week by Invesco Ltd. showed increasing dollar appetite in the coming year.

Piling Up Dollars

A third of the world's central banks plan to increase their allocation to dollars in their reserves in the coming year
Source: Invesco
Note: With regard to dollars, the survey asked "how do you expect the allocation of these reserves to change over the next year?"
In the survey, Invesco explicitly asked whether central banks expected the dollar’s position, as the principal store of value for the world’s foreign exchange reserves, to weaken in the next five years. The result was overwhelmingly in favor of the status quo.

Settled Status

Proposition: "The position of the U.S. dollar as the world reserve currency will be weaker in five years."
Source: Invesco
The euro may well continue to gain while the pandemic persists, though mostly as a result of dollar weakness. But as Invesco said in its report, “it would appear that discussion of the U.S. dollar’s demise as the world reserve currency has been greatly exaggerated.” For now, at least, the dollar’s reign will continue.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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