Dollar stops smiling ‘little by little and then suddenly’ – 05/02/2023 – Nelson de Sá

The New York Times even ran a headline for the Treasury Secretary’s “warning”, “US could run out of money by June 1” if the Republican House “does not raise the ceiling” on Joe Biden’s debt.

Democrats are raising the bar. Hillary Clinton signed the article “Republicans are playing into Xi’s hands” in the same NYT. She argues that they “are sabotaging America’s global leadership” and giving “the Chinese CP a victory”. More specifically:

“Around the world, governments transact in dollars. The centrality of the dollar gives the US far-reaching influence, allows us to impose sanctions. If Congress continues to flirt with default, the calls to dethrone the dollar will get much louder — and not only in Beijing. Countries all over the world.”

Foreign Affairs paraphrased in an article: “Congress threatens to irreparably damage America’s global position. No one should underestimate what is at stake: the primacy of the dollar is a national treasure. The dollar will lose its primacy.”

The magazine appealed to a quote that has been making the rounds in the US dollar discussion as a wake-up call, also used by historian and now Bloomberg consultant Niall Ferguson. It’s from the novel “The Sun Also Rises” by Ernest Hemingway:

“How did you go bankrupt?” asked Bill.

“Two ways,” Mike said. “Gradually and then suddenly.”

The risk for the dollar was evidenced in a series of texts in the Financial Times, for example, hearing from billionaire investor Stanley Druckenmiller, whose “only conviction” today is the bet against the American currency: “You have Lula running around asking why we have to do business with the dollar, and he’s right”.

Along the same lines, columnist Ruchir Sarma pointed out that “the US has used its currency as a weapon, but that has a cost”, also when commenting on the question that Lula asks himself “every night”. For Sarma, ex-Morgan Stanley, now in the Rockefeller group, the rise in gold is already an effect of the “weak dollar”.

With greater repercussion, viralizing the illustration above, the traditional Alphaville column of the FT highlighted the analysis of the exchange specialist Stephen Jen, also former Morgan Stanley, in which he launched his “famous theory” that, when the American economy is doing very well or very bad, the dollar smiles, appreciates.

Today on Eurizon, he released a note stating that the dollar “suffered an impressive collapse” in 2022. The proportion of US currency in total global reserves, which had dropped gradually from 73% in 2001 to 55% in 2021, suddenly fell to 47%. He writes:

“The dollar is losing its reserve currency share at a much faster rate than is generally believed. After falling steadily for two decades, in 2022 it lost ten times faster. central banks without considering changes in the price of the dollar. Adjusting, the dollar has lost 11% of its share since 2016 and double since 2008. This erosion has accelerated precipitously since the beginning of the war. countries holding reserves, mostly from the Global South.”

Elon Musk concluded on Twitter, linking to the analysis: “If you use currency too much as a weapon, other countries will stop using it.”

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