Dollar dominance is facing its biggest test in the (short) history of American empire: True or false?
I don’t think we’re any closer to answering that question now than we were a week ago, but the fact that it keeps coming up is a testament to the notion that we really aren’t in Kansas anymore.
Regular readers know my take: Regardless of whether we’re actually witnessing an epochal shift in international opinion towards USD assets, the nature of the questions is fundamentally different now. For the first time, there are real doubts about Washington’s commitment to a global architecture the US built to suit its own purposes, and overwrought or not, concern for the rule of law in America is pervasive.
If there’s anything to those worries, it means handwringing over an “unsustainable” fiscal trajectory isn’t entirely misplaced. When you sow doubt about US security guarantees for the Western world and about America’s commitment to liberal democratic governance (small “l,” small “d”) you’re undermining the foundational tenets of US hegemony. And whether you realize it or not, that’s tantamount to gambling the exorbitant privilege without which Treasurys are “just another debt instrument” and the dollar’s “just another currency.”
That’s where we are. As Bloomberg’s Carter Johnson, Saleha Mohsin, and Ruth Carson put it in a piece published earlier this week, this risks “a new financial reality… for the preeminent global power and proprietor of the world’s most-coveted currency.”
With that in mind, it’s worth noting that the June installment of BofA’s closely-watched Global Fund Manager survey found professionals purporting to be the most Underweight the dollar in two decades.
As the figure shows, the net share of panelists saying they’re Underweight was ~35%, a tally with virtually no precedent in the poll.
In the “most crowded” trades list from the survey, “short USD” took 20% of the vote and “US dollar crash on international buyers’ strike” remained on the top “tail risk” list, although it slipped to the fourth spot this month from number three in May.
As the bank’s Michael Hartnett remarked, all of this makes “long dollar” the top contrarian trade on Earth, along with “short gold.”
That the dollar’s struggling despite sticky Treasury yields and a stubbornly hawkish Fed is concerning. That juxtaposition suggests that notwithstanding a lack of empirical data to back up sundry “buyers’ strike” narratives, something’s amiss. And at just the wrong time given America’s financing needs are set to grow.
The simplest statistic may be the most poignant. As Bloomberg’s crew wrote in the same linked article, the dollar’s “down against every single major currency in the world” since Trump took office.
We won’t have Trump forever, it just seems like it.
“That the dollar’s struggling despite sticky Treasury yields and a stubbornly hawkish Fed is concerning. That juxtaposition suggests that notwithstanding a lack of empirical data to back up sundry “buyers’ strike” narratives, something’s amiss. And at just the wrong time given America’s financing needs are set to grow.”
Dumb question: how broken are the carry trades in world currencies since “Liberation Day?” (Did they even run that deep to begin with?) I am not certain about the run-ups in gold, silver, or Bitcoin either, as I have seen those markets manipulated before.
What the dollar is doing now is very predictable. Two things are more important than rate differentials. The dollar hates lbeing in a ‘worthless’ war and even worse losing it, and then looking like a loser to the world. Second other than Reagan (who was in no wars), it hates Reublicans in general. The easiest thing for a government to do is trash its currency (all governments, not just the U.S.) Next, war and a dropping currency is great for the military-industrial complex (see Hitler and also Eisenhower’s warning), big Republican donors and voters. Trump hates a strong dollar and says it often. He has also promoted more war and bloodshed in 5 months. My guess is the dollar will decline for the next 3 years. Look back at your history.
Sure seems like most of the DM use the dollar because they have to, not because they want to. Has any other US president even come close to destroying American goodwill like Trump. In 5 months he’s managed to trash every country we use to call ally and friend. If this country badly stumbles, who wont want to pile on.