The Federal Reserve has employed every interventionist trick from the Keynesian statist playbook to appease the vengeful and unmerciful market deities during the COVID-19 financial crisis. The U.S. central bank has continued its century-long tradition of devaluing the dollar, choosing to construct a ceiling on its appreciation throughout the chaos. Despite the Eccles Building’s best efforts to burn dollar bills, the market has broken through the patched-up rooftop and come to the greenback’s rescue. Will investors persist in propping up Federal Reserve Notes, or will Jerome Powell and Co. collapse the buck?
Collateral Damage, Sacrificial Lamb
The U.S. central bank has taken extraordinary measures to prevent the economy from being blown to smithereens. Unlimited quantitative easing, 0% interest rates, and corporate and municipal bond-buying – the Fed has fired the bazookas to prevent a full-blown market meltdown and an economic collapse. One recent tactic involved global coordination with several other central banks to pump dollar liquidity into the international financial system as traders keep scooping up the currency asset.
Main Street and Wall Street still release drops of blood from their lacerations in the “sell everything” frenzy, but the severe hemorrhaging has subsided. Of course, saving the United States from falling off a cliff required collateral damage: the U.S. dollar.
At the beginning of March Madness, the US Dollar Index – a measurement of the greenback against a basket of currencies – topped 103.00 for the first time since early 2017. Investors sought refuge from the extreme volatility and liquidated everything to park their money in cash. It gave the dollar a boost, and if it were not for the Fed, it could have surged higher.
As soon as the Fed intervened, the index slumped 3.5% and slipped below the 100 threshold. However, when the world welcomed April and accepted that more bad news would be the new norm, the dollar was resuscitated by the market. The dollar has pared most of its losses since the end of March, remaining up 4.5% year-to-date. Despite the trillions of dollars injected into the economy, investors do not feel confident in the immediate future. The only thing that could satisfy anybody on The Street would be a Coronavirus vaccine or COVID-19 vanishing like a bat in a wet market.
This sentiment is evident in the fact that $100 billion in Treasurys were sold as the market rushed into the dollar. Traders did not even want anything to do with U.S. government bonds – just the cash. So, the administration is stuck between a rock and a hard place: It is determined to weaken the dollar to rejuvenate America’s exporting base, but traders were dumping T-bills and T-notes. For consumers who will inevitably endure a spike in price inflation on the other side of the lockdown, these are also concerning monetary maneuverings with lingering consequences.
The De-Dollarization Push
A Fed-fueled dollar collapse would please several significant parties across the globe.
The share of dollars held in global reserves has fallen to around 60% as more central banks diversify into the euro, the yuan, and the yen – the Australian dollar is also gaining some traction. It is not surprising that the nations leading the anti-dollar charge are China, Iran, and Russia. However, it is safe to say that other countries are likely fed up with the dollar being the premier reserve currency of the world and no longer want to be beholden to the United States.
If America’s adversaries were successful in their de-dollarization blitzkrieg, would it destroy the dollar’s value? No, but the U.S. government would lose its influence on the rest of the planet. The key for the dollar is the view in global financial markets that it is as good as gold and that it will stand the test of time for eternity.
Despite historic fiscal and monetary stimulus packages that will trigger the inflation bomb, investors still demand dollars. This suggests that either the currency is a beacon of prudence and responsibility or most other currencies are lost causes. Considering the reckless abandon executed by the smartest creatures in the Swamp, it is most likely the latter.
American officials are not directly participating in a de-dollarization push. Still, they are on a crusade to eviscerate the greenback to satisfy the unsound money disciples of John Maynard Keynes. The hostility to sound money produces a few unkind scenarios: currency war, pleasing America’s foes, and/or price inflation. Not one of these instances is pleasant for anybody.
Moscow and Tehran will not be responsible for the greenback’s demise. The Federal Reserve System will instigate the dollar collapse through expansionary monetary policy. In two weeks, the country’s money supply surged 4%, adding a fresh supply of dollars into the economy – the politicians and financiers get first dibs! The balance sheet, which was contracting just a year ago, has ballooned 15% in a month. These are all factors that would contribute to inflation and higher prices over the next 12 to 18 months. But who cares about tomorrow when you are trying to bandage the wound right now? The Fed lives its life one trading session at a time, and if it can help produce 1,000-point gains, then weakening the buck is worthwhile.
Read more from Andrew Moran.
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