The US Dollar Is the Big Winner in the War in Ukraine So Far.
America seems likely to emerge as the medium-term winner of this war. In the long term, the question remains open.
While it appeared weakened in the first months of the COVID-19 pandemic, the US dollar continues its spectacular recovery. The U.S. dollar is thus up against the vast majority of currencies. Against emerging currencies crumbling under the weight of inflation and rate hikes of course, but also against the currencies of developed countries.
Let's take the example of the euro.
The euro has just fallen below $1.06 to $1.0544. A year ago, the euro was above $1.22:
The rise of the US dollar against the yen is also spectacular. The U.S. dollar has just spiked above 130, up from around 108 just a year ago:
For those unfamiliar with the foreign exchange market, be aware that these are extremely significant changes. Even more so in a market that barely fluctuated during the COVID-19 crisis.
A recent survey published by Central Banking among the reserve managers of the world's central banks is clear: 59% of them consider the US dollar as the best safe haven.
Yet for decades everyone has been telling us that the hegemony of the US dollar is about to end. I am frequently among those who talk about this with the de-dollarization of the world to come in my opinion.
However, at the time of writing, it seems that this is not yet the case. Almost 60% of central bank reserves are still denominated in US dollars according to the IMF:
When officials are asked to justify the continued dominance of the US dollar, their answer is always the same: TINA. For “There Is No Alternative”. This is not entirely true, since the euro or the yuan have emerged over the last two decades, but not in a way that threatens the hegemony of the US dollar over the world.
What is most interesting here is to observe that despite all the predictions of decline that have been published about America for many years, America always emerges stronger from major global crises. And this war in Ukraine is likely to prolong that. We can see that it is indeed America that is at work to support Ukraine. The Pentagon is now even considering the possibility that Ukraine could win this war against Vladimir Putin's Russia.
The American sanctions taken against Russia will benefit America twice
The sanctions taken by America, in consultation with the European Union, against Russia will do two things. First, they will weaken Russia permanently. Even if Russia will fall into the arms of China, it will be greatly weakened. Secondly, America has managed to bring the whole of Europe under its military umbrella.
Germany, for example, has decided to invest $100 billion to catch up on its military equipment. And this is only the beginning, as more investments will be announced in the future. Everything impossible before this war in Ukraine now seems to be possible. Of course, Germany is ordering equipment from the American military-industrial complex.
So America has already succeeded in recreating an America-Europe block, which will be under its command.
Under military command, of course, but only. The American command will also be on the energy level. Let's remember that, unlike Europe, the United States is an independent and even an energy exporter. And they are going to sell more and more gas to Europe, which has to find new sources of supply so as not to be ultra dependent on Russian gas.
Add to this the full employment in America and you understand better the plebiscite of the American dollar.
Of course, we could temper all this with America's problems, which are an abysmal debt that recently exceeded $30 billion, a huge deficit, growing poverty, and a deplorable social system. You would even be right to point out all these points that I frequently worry about.
Final Thoughts
The American model has many flaws. Major flaws even. But for the moment, and everything can still change in the future, investors have chosen the US dollar as a safe haven. This is a simple observation that we have to make.
While waiting to see the longer-term consequences of this war in Ukraine, with the possible emergence of a Bretton Woods III backed by outside money that would weaken the US dollar, the US dollar is well on its way to allowing America to emerge as the big winner from this war in Ukraine in the short and medium-term.
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