Shares for the week ahead: is the US dollar threatened?

About 60% of the $ 12.8 trillion in world foreign exchange reserves are now held in dollars, giving the U.S. extraordinary privileges over other countries. And that privilege pays off: because the U.S. public debt, backed by the dollar, is very attractive, interest rates are lower. The US borrows from other countries in its own currency – so when the US dollar loses value, debt also loses value. U.S. businesses can make international transactions in dollars without having to pay a conversion fee.

Perhaps most importantly, in extreme circumstances, the United States could close dollar access to central banks around the world, isolating and destroying their economies. Raghuram Rajan, former head of the Reserve Bank of India, calls the government “an economic weapon of mass destruction.”

The United States detonated these weapons against Russia in February after the country invaded Ukraine, freezing foreign exchange reserves by $ 630 billion and deeply undermining the ruble’s value. This gave America the opportunity to punish Russia without involving American troops in the war.

But with great force comes great responsibility: when you use weapons of mass destruction, even economic ones, people get scared. To protect themselves from the same fate as Russia, other countries are diversifying their investments from the US dollar to other currencies.

This is where the country’s reserve currency status may face challenges.

Arming the dollar, said Michael Hartnett, a strategist at Bank of America, could lead to its depletion. “Balkanization of global financial systems” undermines America’s role as a reserve currency, he added.

A new study by the International Monetary Fund found that the dollar share of international reserves has been declining over the past two decades, around the same time as the United States started the war on terrorism and sanctions against terrorism. One quarter of the reserves have since shifted from the dollar to the Chinese yuan, and the remaining three quarters have been converted into the currencies of smaller countries.

“These observations hint at how the international system may evolve in the future,” warned IMF co-authors Serkan Arslanalp, Barry Eichengrin of the University of California, Berkeley and Chima Simpson-Bell of the IMF.

Russia and China also hope to drive the evolution of the international system.

Russian President Vladimir Putin on Thursday threatened to stop gas exports to countries that do not open an account with a Russian bank and pay in rubles. The European Union gets about 40% of its gas and 30% of its oil from Russia without easy alternatives.

Meanwhile, Saudi Arabia is in talks with Beijing to adopt the yuan instead of dollars to sell Chinese oil.

So the royal dollar is going to overthrow the throne?

If we have been taught anything for the last two years, it is because nothing is impossible. But the prospect of the U.S. losing this disproportionate privilege is highly unlikely.

On the one hand, the alternatives are not great. China has been pushing the yuan for years, and only about 3% of global transactions are conducted in foreign currency, compared to 40% for the dollar.

The US is also still quite attractive to the rest of the globe. The U.S. stock market is the largest and most liquid stock market in the world, and foreign capital is flowing into the country. Global foreign direct investment flows rose 77% to about $ 1.65 trillion in 2021, but U.S. investment rose 114% to $ 323 billion, according to the UN Conference on Trade and Development.

Goodbye Q1, hello Q2!

The second quarter may not be fun, but at least we’ll be ready for it.

The first quarter of 2022 ended this week, when major stock indexes showed the worst performance in two years. Rising inflation, the Russian invasion of Ukraine and the acceleration of the Federal Reserve’s rate-raising plan have created a number of unique challenges for investors.

These problems will continue in the second quarter. But often the devil you know is better than the devil you don’t know.

We asked analysts who they predict will be the biggest headwinds this quarter and how they are preparing for them. Here’s what we found.

Geopolitical unrest: Russia’s invasion of Ukraine has stunned markets around the world. Geopolitical unrest has engulfed energy markets, commodities and even food security issues.
Josh Leonardi, director of core services at TD Securities, is looking for commodity markets where raw products are sold to hedge against the Russian conflict. He especially loves wheat. About a quarter of the world’s wheat supplies come from Russia and Ukraine. Future harvest contracts are coming to an end as supply becomes scarce but demand remains the same.

Probably better not to rely on oil and energy, as these goods were particularly volatile and responsive to news updates.

Inflation: The U.S. is currently battling an inflation problem it hasn’t seen in 40 years, so it’s time to look at real assets as hedging against inflation, Leonardi said. This means investing in goods, real estate, land, equipment and natural resources.

According to him, interest in real estate investment is growing. “I don’t know if there’s anything hotter on the market right now. You have everything from single-family homes to data centers and cold storage. ”

When investing in markets, look out for companies that make money on inflation. Banks earn more as interest rates rise, and they profit from wider spreads. Companies with low capital needs also have good rates.

Tariff increase: The Federal Reserve is likely to aggressively raise interest rates in the future, said Liz Ann Saunders, managing director and chief investment strategist of Charles Schwab.

Usually investors believe in a security guard known as the “Fed delivered”. It is argued that sufficient market weakness will force the Fed to stop raising interest rates and tighten policies, and perhaps even repeal and ease rates. Due to the fact that inflation is so out of control, this time it will not happen, Saunders said.

“Investors need to know this, especially if they’re more aggressive because they think the Fed won’t let the markets down,” Saunders said. They will continue to raise rates and will do so to slow economic growth. This means that the risk of a recession is higher than it would otherwise be.

Next

Monday: U.S. car sales for March published by BLS; Investor Movement Index on Main Street, published by TD Ameritrade

Tuesday: New York Fed President John Williams talks about the economy

Wednesday: FOMC minutes are published at 14:00 ET

Thursday: Weekly unemployment statements have been published

Friday: Eli Lilly reports earnings before the call

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