There Is No Alternative – The Omnipotence of the USD King Has Been Confirmed More Than Ever in 2022.
The reasons are multiple and have been highlighted with the war in Ukraine.
The American dollar? There is no alternative. If the U.S. dollar keeps confirming its hegemony, it is simply because there is nothing to replace it.
What would you want to buy instead of the USD? The euro, while the Old Continent is suffering the full force of the war in Ukraine and the energy shock? The British pound, which is not much better off, less attractive since the Brexit? The yen, in free fall, while Japan still maintains its rates at zero? The Chinese yuan, while the country is sinking in the real estate crisis and represents a major geo-economic risk, under the neo-Maoist rule of President Xi Jinping?
Bitcoin could be the answer, but for the moment, the general public is far from having integrated what Bitcoin is: a unit of wealth independent of the control of governments and central banks. That time will come, but later …
Before any technical analysis of the dollar, the United States has a lot of assets: it is not threatened by war; it is the world's largest producer of hydrocarbons, so it is not weakened by the current energy shock; its companies are in good financial health; the US economy is hit by inflation, but seems to be further ahead in its fight than its partners, especially in Europe.
In a context of economic, political, and monetary uncertainty, the US dollar is the haven.
In detail, the greenback is now worth more than 1 euro, for the first time since 2002. It has gained 16% in one year, against the European currency. And this rise is widespread: it has risen by 20% against the British pound, which is at its lowest level since 1985, and by 30% against the Japanese yen, which is back to its 1998 levels. It has gained 8% against the Chinese yuan.
Since the beginning of 2022, according to the Wall Street Journal Index, the dollar has appreciated 13% against all currencies. The most common explanation for this is rates. The U.S. Federal Reserve has been raising rates since March 2022, and now pays short-term money at a rate of over 2.25%. The interest rate will probably rise to 3% at the Fed's monetary policy meeting at the end of September 2022.
Today, it is better to invest your money in the United States, where the interest rate on ten-year government bonds is 3.4%, compared to 1.73% in Germany and 0.25% in Japan.
America's technological lead
In today's world, foreign exchange is not only defined by purchases of U.S. Treasury bonds but increasingly by purchases of stocks and corporate bonds. If the dollar is rising, it is because investors around the world are buying US stocks, preferring Apple to Volkswagen - hit by the European crisis - or to Alibaba and Tencent - taken over by the Chinese Communist Party.
Corporate profits have held up so far, and the outlook, even if revised downwards, remains better than in Europe. From an economic point of view, the gap can be explained, among other things, by the energy shock. The US is an oil country. When energy prices soar, the United States gets richer - as do the members of the Organization of Petroleum Exporting Countries - while Europe and the Asian countries (South Korea, Japan, China, India) get poorer.
This is particularly dramatic for European manufacturers.
To compensate for the loss of competitiveness of Europeans, the euro would have to fall to 0.80 dollars, which would further increase inflation. The explanation is much more fundamental. According to former U.S. Treasury economist Marvin Barth, quoted by the Wall Street Journal, the reason the dollar is strong is because of the United States' ability to innovate.
Technologically, it is crushing the rest of the world, as shown by the success of Google, Amazon, Facebook, and Apple (GAFA) over the last twenty years: their technological lead allows them to invest, attract capital and collect wealth, all of which drive the dollar up. Technically, American assets are considered expensive, but this is because the companies are growing strongly.
We can add to this their considerable margins, due to their domination of the markets (the winner takes all) and their de facto cartelization on American territory, documented by the New York University economist Thomas Philippon.
Until recently, American companies have shown themselves capable of passing on their prices to consumers. In the United States, the Fed and the Treasury have been pursuing a de facto concerted policy to reduce price increases by raising rates and dramatically reducing the budget deficit. The results are far from satisfactory, as the disastrous July 2022 inflation figure showed, but there is little doubt about the American determination.
Nothing of the sort in Europe. Governments continue to feed inflation with their budgetary aid programs to compensate for the energy boom. The European Central Bank (ECB) is cautious, fearing that too sharp a rise in the cost of money would rekindle the currency crises that Greece and Italy experienced a decade ago.
As long as the ECB does not raise rates drastically, the euro is not expected to rebound and the US dollar is likely to remain strong. In the meantime, according to the International Monetary Fund, the dollar accounted for 59% of the world's foreign exchange reserves in the first quarter, compared to 71% in 1999, when the euro was launched. And it weighs about 40% of world trade, four times the weight of the United States. The euro is stagnating at around 20%, the yen at 9%, the pound sterling is up around 5%, the yuan at 2.9%, and the Canadian and Australian dollars are up slightly.
A very slight diversification
There is a decline, a slight diversification (not to the benefit of the euro), but certainly not a substitution. The first explanation is that becoming a reserve currency has many implications - it is necessary to export one's currency, and therefore to issue many securities, but those of the eurozone are not homogeneous enough to serve as a safe haven (German debt, which is scarce, and Italian debt, which is more abundant, are not identical).
The creation of an alternative to the US dollar is regularly envisaged, because of its political instrumentalization by Washington. The outcry over the fines imposed on European companies for doing business in US dollars with countries under US embargo (Iran, Sudan, etc.) masks another reality: multinationals are complying with US law, such as TotalEnergies, which withdrew from Iran in 2018, while banks that were once sanctioned, such as BNP Paribas, are sickly afraid of the US authorities.
The freezing of assets in Afghanistan after the Taliban take power in Kabul in 2021 and their partial use to compensate the victims of the September 11, 2001 attacks have caused little stir. The debate bounced back during the war in Ukraine, with Moscow turning to China. But Russia, the world's 11th largest economy, has a nominal gross domestic product equivalent to that of South Korea, while Beijing, in full retreat, has never succeeded in making the yuan a credible currency of exchange: the geopolitical risk remains major, with the threat of invasion of Taiwan.
These adversaries of the United States are disengaging from the American currency: China has reduced its dollar holdings from more than 1.3 trillion in 2013 to 980 billion today, but it is far from liquidating them. Russia's has gone from $175 billion to almost zero since 2010.
But which external investor will take the risk of choosing the Moscow-Tehran-Beijing axis rather than the dollar sphere? As you can see, there is (for the time being) no alternative to the US dollar.
Some reading
“Das Krisenjahr” – The Trauma of the Hyperinflation of 1923 During the Weimar Republic in Germany. The fight against inflation has since become a doctrinal pillar of Germany.
This Is the Book to Read If You Want to Discover the True Face of the Kremlin Dictator Vladimir Putin. Catherine Belton’s book will help you understand why the West must support Ukraine at all costs.
We Are Year 13 After Bitcoin Network Came Into Existence. Nothing Will Ever Be the Same Again.
Faced With Inflation, Diocletian Capped Prices Which Didn’t Prevent the Roman Empire From Collapsing. The fall of the Roman Empire was already unstoppable.
The FBI Warns of Increasingly Aggressive Chinese Espionage in America. The FBI Director is talking about an unprecedented level, bolder and more dangerous than ever.