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.”
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.
“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.
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.
Goodbye Q1, hello Q2!
The second quarter may not be fun, but at least we’ll be ready for it.
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.
Probably better not to rely on oil and energy, as these goods were particularly volatile and responsive to news updates.
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.
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