This Week Is Likely To Change The Course Of The US Dollar

Finance

  • Author David Reavill
  • Published June 12, 2023
  • Word count 1,056

This week will likely see a massive tectonic shift in international finance. Multiple forces have converged to create this once-in-a-generation climax in national currencies. It's a finale that's bound to affect you and me.

This tremendous financial drama's opening act will take place on Wednesday. The Federal Reserve will once again set short-term interest rates. It's been quite a year for the Fed. In the past 15 months, the Fed has taken our base interest rate from near zero to 5 1/4%. Wall Street is convinced that the Fed is finished with its interest rate hikes.

I'm not sure.

Wall Street has accepted the Fed's claim that they are hiking rates to curb inflation. And indeed, that is a contributing factor in the Fed's actions. But it is far from the only reason the Fed has moved to higher interest rates. Like a series of dominoes, this move to hike rates has many varied and diverse repercussions. While it's true that raising rates does help curb inflation by increasing the cost of borrowing and slowing economic activity. And the Fed is more than justified in discussing the impact these higher rates have on inflation. That is far from the whole story.

Inflation is the domestic story, and its impact is felt particularly by us. But on the other side of this "coin" is the international story. A story that will take months and perhaps years to play out before it impacts the average citizen. But make no mistake, the long-run prosperity of our country rests on the international dimension of the Fed's actions, along with the efforts of a new multipolar international community.

For international financiers, a key component of utilizing a currency is the current return (interest rate) they can receive from holding reserves. And currently, the actions of the Fed have brought US Dollar returns far ahead of other major currencies. Considering holding funds in British Pounds?, you can improve your yield by 3/4% by moving to Dollars. While a 3/4% increase may not seem like a lot, the difference in return for a billion dollars is $625,000 per month—enough to get the average investment broker a lunch or two.

With the current high Fed interest rate, the US Dollar has a 150 basis point advantage over the Euro, a 160 basis point advantage over the Chinese Yuan, and an almost unbelievable 375 basis point advantage over the old favorite Swiss Franc.

It's no accident. It's all part of a strategy called "defending your country's currency." It was, and still is, a primary responsibility of the Central Bank in any developed nation. When a currency is worth more, you can purchase cheaper foreign goods and sell your country's exports for a higher net return.

While "defending the currency" is an integral part of every country's monetary policy, no one wants to talk about it for fear of setting off a currency war. Where two nations start to raise interest rates to strengthen their currency but at the same time slow their economy. It becomes a loose-loose after a certain point.

So, the question arises: if "dollar defense" is the other half of the Fed's current monetary policy (inflation being the first half), then why does the Fed feel compelled to defend the Dollar now? And that brings us to the second part of our climatic week. On Wednesday, the same day the Fed will make its interest rate decision, halfway around the world in St. Petersburg, Russia, many nations on the other side of the growing east/west line will also be at this meeting.

The event is the St. Petersburg International Economic Conference. And most prominent in attendance will be the leader of the so-called BRICKS Nations: Brazil, Russia, India, China, and Kazakhstan. We can add Saudi Arabia as the letter "S" in the acronym, although they have only recently looked to join BRICKS. There can be little doubt that Modi of India, Xi of China, and Putin of Russia are the driving forces behind this relatively new organization.

The scope and reach of the BRICKS and this relatively new St Petersburg Conference are stunning. The leaders assembled here represent most of the planet's population and are dominant in traditional energy. Nine of the world's top ten oil-producing countries will be in attendance. Only the United States of the world's top oil producers, will be absent.

I suspect that the Conference's most popular and certainly most impactful session will be on Thursday morning when the attendees will address" "Dedollarization, The Future of Money."

To quote the agenda for the meeting:

[In] " a multipolar world economy, the flaws of the dollar-centric financial system, established in the latter half of the twentieth century, become increasingly apparent. The freezing of Russian reserves has transformed reserve currencies into geopolitical weapons, casting a shadow over the stability of settlements with trading partners in US dollars susceptible to Washington's ability to impede transactions deemed suspicious. Consequently, global economic trust in the US currency wanes, prompting a surge in de-dollarization."

https://forumspb.com/en/programme/business-programme/104305/

Unquote

This comment is but a glimpse into the contempt that the other half of the globe holds for this current American administration and their free use of sanctions and impounding reserves and deposits of other nations.

Rumors have it that the members will propose a gold-back alternative currency to the US Dollar at this Conference. Of course, that would be devastating to the Dollar.

I've included an interesting chart showing the course of interest rates and the Dollar for your review. We expect the Dollar to appreciate as interest rates rise. And that's just what happened until last September. The Dollar peaked in September, the six-month anniversary of President Biden's multifaceted strategy of a. "sanctioning" Russian oil and gas b. impounding $300 billion in Russian international trade deposits held by US Banks, and c. blocking Russia from access to SWIFT, the dominant global trade system.

What began with the American policy of economically opposing Russia and its incursion into Ukraine was seen one way by Americans and entirely the opposite by the rest of the world.

Those assembled in St. Petersburg this week are bound and determined to knock the US Dollar off its pedestal as the World's Reserve Currency. And it's not likely that the Federal Reserve will be able to raise interest rates high enough to prevent that from happening.

David Reavill, financial writer, financial iconoclast, and outdoors enthusiast.

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