On Tuesday, there was important news on the de-dollarization front.
In what we (correctly) described as a “brazen” move, the E.U., China and Russia announced their intention to establish an SPV that will allow everyone to simply circumvent Trump’s sanctions on Iran.
The E.U.’s Federica Mogherini told the UN General Assembly that the vehicle “will allow European companies to trade with Iran in accordance with EU law and could be open to other partners in the world”.
A joint statement from foreign ministers of China, Russia, Germany, the UK and France says the deal is designed to “assist and reassure economic operators pursuing legitimate business with Iran”.
The U.S. was of course quick to play down the news. Specifically, John Bolton and Mike Pompeo said Washington simply won’t allow anyone to evade the sanctions.
“[Anyone who establishes financing vehicles] does so at their own risk,” Bolton declared, while speaking to United Against Nuclear Iran (that’s a group, apparently) in New York. SWIFT, he went on to warn, should “take a good hard look at their business with Iran.”
Speaking at the same event, Pompeo called the SPV idea “one of the most counterproductive measures imaginable for regional and global peace and security”.
Our take, as communicated pretty explicitly in the first linked post above, is that this SPV may not be as far-fetched an idea as Washington would have you believe. Here are a couple of passages from that post:
This certainly sounds like it’s designed to promote the internationalization of the euro. If that’s indeed the case, it would mean the E.U. has bigger things on its mind than simply preserving the JCPOA.
If the European powers view this as an opportunity to de-dollarize at a time when the U.S. is seen as an increasingly unreliable partner for France and Germany, well then Europe’s resolve might be stronger than Washington anticipates.
As it turns out, JPMorgan’s Marko Kolanovic agrees.
In a note out Wednesday morning, Kolanovic reinforces the notion that the aggressive posturing of the current U.S. administration both with regard to trade and foreign policy more generally, has the potential to accelerate the global de-dollarization push.
“One can look at the US Trade deficit as a trade surplus in which the US is acquiring goods in exchange for USD bills”, Marko writes, explaining what trade deficits actually mean, before noting that this arrangement is inherently beneficial to the country that prints those dollars.
“The exchange of natural resources and labor for inherently worthless fiat currency, as well as broad USD ownership has many benefits for the US [as] USD acquired in trade is often deposited in reserves (e.g., treasuries or other US assets) thus reducing the cost of capital for the US government and businesses”, Kolanovic continues, adding that “in this way, global trade and related ownership of USD keeps domestic inflation low, and is helping finance the US government (e.g., military, foreign policy, etc.).”
Well, the more aggressive the U.S. is when it comes to effectively using the greenback as a tool of economic warfare and deploying that weapon indiscriminately against allies and enemies alike, it’s possible that the world will begin to see more utility in de-dollarization. As Marko puts it, “with the current US administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the USD and USD-centric finance.”
Kolanovic goes on to highlight the above-mentioned SPV as a case in point. Here’s Marko essentially reiterating what we detailed on Tuesday morning:
Recently, there are developments that suggest such a diversification could take place, and is being catalyzed by policies of the current US administration. The EU foreign affairs chief announced this week the creation of a ‘special vehicle’ for trade despite US sanctions, and similar ideas were promoted by Germany’s foreign minister. US unilateral policies risk bringing major powers of China, Europe and Russia closer, and such an alliance could profoundly impact the USD-centric financial system. While the current US administration may be a catalyst for long-term de-dollarization, such diversification may be prudent even if Washington policies change. For instance, currency/rate diversification might be in the best interest of Emerging Market economies, time and time again left at mercy of US Federal Reserve rate cycles.
So how might one hedge for such an epochal shift in the international financial system? Well, clearly that’s a question that can’t be answered definitively, but in the short term, Marko takes the opportunity to suggest that against a backdrop that sees the U.S. continually ratcheting up the pressure, folks might simply shift to non-USD assets.
“Another asset of interest should be gold and materials stocks”, he continues, before noting that “current positioning in gold is extremely short [as] aggregated investment in gold ETFs and futures as a fraction of the S&P 500 price is currently near the lowest point in a decade.”
Needless to say, all of the above reinforces Marko’s recent call for a convergence between U.S. stocks and the rest of the world, catalyzed by dollar weakness and ex-U.S. assets catching up to the ebullient sentiment that’s manifested itself in record highs on Wall Street despite myriad bear markets on international benchmarks and in certain sectors of the European equity market.
More broadly, though, Kolanovic’s point about the Trump administration’s policies potentially accelerating the push towards de-dollarization is extremely important for obvious reasons.
Although Marko doesn’t say this, what we would note is that there’s more than a little irony inherent in the notion that a policy platform built around making America “great again” could end up dethroning “King Dollar”.