Between falling financial markets (stocks, bonds, and cryptos), rising inflation and rising rates, and prospects of a global recession against a backdrop of geopolitical tensions with the Russian war in Ukraine, there remains one winner: the dollar.
The dollar index which measures the evolution of the greenback against a basket of six currencies: euro (which represents 57.6%), yen (13.6%), sterling (11.9%), Canadian dollar, krona (Swedish krona) and Swiss franc are at their highest for 20 years (see graph).
“The US dollar is perfectly playing its role as the ultimate safe haven in the foreign exchange market in the face of the accumulation of economic, financial and geopolitical risks. This is what is commonly called a flight to quality”comment the experts of Mondial Change, a platform specialized in the foreign exchange markets.
Against him, the euro and the pound sterling have lost 14% of their value over one year. At the same time, the dollar appreciated more than 18% against the yen, 5.7% against the yuan and almost 13% against the Korean won. Even gold, yet the safe haven par excellence against inflation, fell by 3.5% over one year!
The dollar loses more than 13% against the ruble
Only against the ruble has it lost more than 13.55% over one year, trading around 65.85 rubles on Monday after reaching a record high of 150 rubles in early March. Obviously, the situation of the Russian currency is particular because of the measures taken by the Russian central bank, in particular the imposition of strict capital and exchange controls.
“The dollar looks set to stay ahead of the G10 currency pack as other countries, notably in Europe, grapple with stagflation risks and the Fed continues to hike rates.”underlines Steven Barrow, economist at the Standard Bank.
This is the reason why, in an environment where investors around the world are seeking to secure their return in a context of great uncertainty about the outlook, US debt remains attractive. Comparing 10-year bonds, the US Treasury bond is yielding 2.9%, while the UK Gilt is at 1.79%, the German Bund at 1% and the French OAT at 1%. .52%, and the Japanese bond at less than 0.25%.
This strength of the dollar also allows the United States to make its imports less expensive, which makes it possible to limit inflation which is still at 40-year highs, posting in April at 8.3% over one year. It also gives the Federal Reserve some leeway, which began to tighten its monetary policy in March, and intends to continue raising rates in the coming months to calm the general surge in prices. For American companies, what is at stake depends on their status. Those who import intermediate goods can thus maintain the prices of their products or even lower them, on the other hand, those who export become less competitive on the international market.
However, the international situation is not good, with a growing risk of recession. In Europe, the economic outlook looks more difficult. The IMF has just revised downwards, from 3.9% to 2.8%, the growth of the euro zone in 2022. The European Commission forecasts 2.7% inflation which should remain high at the end of year at 6.8%. A black scenario for the European economy which is also a consequence of the war in Ukraine and the effects of Western sanctions on Russia.
The dollar appreciates by 7% against the yuan in less than a month
Similarly, the impact of strict confinements in China, particularly in Shanghai, following the zero-Covid strategy, is beginning to weigh on its economy. Several indicators attest to this for the month of April. Unemployment soared to 6.1% over one year, a rate which is approaching the record of 6.2% reached in 2020 in the midst of a pandemic. Exports rose by 3.9%, the lowest monthly increase since June 2000. A surprise compared to the month of March during which they rose by 14.7%. Retail trade contracted again in April, by 11.1% over one year, after 3.5% in March. The country’s industrial production fell by 2.9%. With the exception of the pandemic period at the start of 2020, industrial production had never contracted in more than 30 years. Finally, on the side of the financial markets, the index of the Shanghai Stock Exchange is down nearly 13% over one year.
As for GDP growth, the 5.5% target set by the Beijing authorities for this year will become difficult to achieve. The International Monetary Fund (IMF) now expects 4.4% for the People’s Republic. Unprecedented situation for decades, the gap between the growth of China and that of the United States (3.7% according to the IMF) is narrowing.
This competition between the two economic giants is found between their currencies. In less than a month, the dollar has appreciated by almost 7% against the yuan (see graph).
But unlike the dollar, the yuan, the only currency emanating from a world economic leader (even the course of the ruble until the application of Western sanctions depended on the foreign exchange market) which exercises capital controls, sees its value fixed by the central bank of China (PBOC). In other words, any holder of the Chinese currency is threatened with a sharp devaluation and the inability to freely use the currency for payments if Beijing chooses. In addition, China is the second largest foreign holder after Japan of US debt, with an amount of 1.054 billion dollars in February, according to the US Treasury.
China, a marginal share in international payments
In the wake of the sanctions imposed on Russia, the willingness of some countries to use the yuan to settle international contracts has increased. According to the latest data from the now famous company Swift (Society for Worldwide Interbank Financial Telecommunications), the share of payments in Chinese currency had reached a new record in January with 3.2% of global payments. However, even if these transactions have progressed, they remain very far from those in dollars (some 40%), in euros (36.5%) or even in pounds sterling (6.3%).
Far from being penalized by the “dedollarization” of the world economy, the king dollar could even come out stronger in 2022.
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