EC The Dollar And Its Rivals

Yes, there are intellectual fads, and references to currency wars faded.  There is a new game afoot. The weaponization of the dollar is not about price but about access.  It did not begin in 2016 but has steadily increased since 9/11.  The US is using access to what had heretofore been a public good (utility), namely the use of the US financial system and dollar funding.

The US threatened to use its financial power against the UK in the Suez Crisis in 1956.  One result was that the Soviet Union took its dollars out of the US and deposited them in British clearing banks. In so doing the Communists gave birth to the eurodollar market, the offshore market for dollars that was not beholden to US interest rate cap and other regulations.  The increasing willingness of the US to deny access to the dollar market is spurring more talk of alternatives.  

Europe is expected to announce tomorrow a new initiative to boost the use of the euro. The immediate spur is the US decision to pull out of the agreement with Iran and re-apply sanctions.  It has granted a six-month exemption for limited oil sales, but the financial embargo includes cutting Iran off from the Belgian-based SWIFT system.  

When the US first announced this, European officials tut-tutted and threatened to launch its own payment system.  The Zero Hedges of the world jumped up and down declaring once again the demise of the dollar. It turns out that no country wants to host the special purpose vehicle that was supposed to offer a workaround to the US financial embargo. The launch of the Asian 

Infrastructure Investment Bank, a parallel Chinese-sponsored development bank was also celebrated as a sign of the demise of the US and the role of the dollar, until it was learned that subscriptions and loans were in US dollars. 

Russia, worried about US sanctions, appears to have reduced its dollar reserve from $96 bln in March to about $14 bln in May.  US Treasury figures suggest it has remained in the $14-$15 bln area for the last several months. It might have shifted its holdings to the Chinese yuan, as some have suggested. The yuan did see a jump in reserve holdings. However, Russia may have just part of the dollar reserves out of the US banking system entirely and therefore might not be detected by the Treasury methodology. Russia reportedly is close to issuing euro-denominated bonds for the first time in five years.  

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Read more by Marc on his site Marc to Market.

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Harry Goldstein 11 months ago Member's comment

Very impressive.