Ransquawk

Globalization leads Greenback away from domestic influences

In the past when FX traders were seen as little more than gamblers with their employer bank’s money, the influences over each individual currency were well defined and the dollar, despite being the prime medium used to settle global trade was primarily influenced by domestic events.

Perhaps it is the totally new way in which the U.S. is now governed or the fact that the financial crisis has closed rather than widened the gap between Central Banks who now tend to work together as they appear to be driven by the same influence; inflation, but the FOMC while of academic interest is now starting to fade as a driver of the dollar.

The recent rally in the dollar has been based on President Trump and his unsurprising desire to dominate all he surveys. In the past his fief was domestic but as “Leader of the Free World” he clearly feels obliged to right all that ails the world (from his standpoint).

It was my opinion that the market was starting to move away from the “first Friday mayhem” that is the employment report to find a new piece of data to concentrate upon, most likely inflation, but I am beginning to believe that there is no data that will create sufficient interest, so another short-term driver could be set to disappear.

Does the world need a reserve currency anymore?

There is little doubt that the dollar remains the preeminent global currency. It was becoming threatened by the euro but that may take longer, if at all, to come to fruition. Clearly China has ambitions in that regard but much as the dollar was used in the 70’s and 80’s as a force for dominance, it is highly unlikely that that will be allowed to happen again and there will always be scepticism over Chinese motives however fanciful those views may be.

Oil was one of the prime reasons that the dollars influence grew. The countries of the middle east, in the main, still use dollars although they are thinly disguised and Riyals, Dirhams or Dinars, pegged to the greenback.

Over the next 20/30 years oil will play a less and less significant role in the global economy and that will be the final nail in the dollar’s “global reserve coffin”.

Of course, over the same period, the role of fiat currencies in general will be questioned and at some point, a cryptocurrency backed by all the major nations could easily be adopted.  

Fifty or even forty years ago, futurists were imagining flying cars, space tourism and other innovations that were the stuff of science fiction but mundane matters like currencies and the global economy were simply passed by, but that is where the next innovation is likely to come.

Brexit bucks the trend

The financial crisis of 2007/8 was expected to be the end of the growing trend towards globalization as the interlinking of markets and their drivers had been a major contributory factor.

On the contrary, globalization has continued at a pace as, despite decades old political dogma that believed that capitalist economies would suffer boom/bust scenarios and periodic recessions, trade pacts and closer economic ties have become the norm.

It was therefore even more of a surprise that the UK decided to go it alone with Brexit rather than stay within the EU and try to affect change from within.

That is the issue with then Prime Minister Cameron’s fear of the rise of a new political party that was able to “rabble rouse’ to such an extent that he gave in to their demands which brought about his ultimate political demise.

The fact that the UK is going to try to “go it alone”, not being tied to any “trade bloc” is the ultimate political and economic “don’t try this at home kids” action that the world will watch but thank its god that it isn’t part of.

That is why I cannot hold out too much hope for the UK economy and the pound. Recession beckons and the only reason for the Bank of England to raise rates today or any time in the next three years is to give them a chance to cut them in the forlorn hope of stimulating economic growth.

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