Monthly Archives: February 2017

It’s not “the Donald”. It’s “the dollar”, stupid.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies.

On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities. On the other hand, they cannot pursue different domestic and international objectives at the same time. (…)

The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.”

 Governor Zhou, People’s Bank of China, 23 March 2009 (emphasis mine)

Most pundits are unaware of the relevance of the USD at this point in time. They’d rather skip the point. I listen to frequent complaints on the “unpredictability” of currency prices. Maybe, just being naughty here, the underlying reason is that trading the majors, ie USD/JPY or EUR/USD, is tantamount to singular trading capabilities for most. I honestly find currencies more predictable than equities, but a host of market players prefer to engage in stock trading with a long only bias. We have to bear in mind the extraordinary behavioral biases that have been engendered by decades of easy money -and it’s certainly addictive to go long with a Greenspan kinda put to cover your back.

Unfortunately, notwithstanding the difficulty of getting the dollar right, at this stage, it is a must. It is “the dollar” (and not “the Donald”) that will be the main driver of global financial market developments for the next couple of months -and even well after we transition into a new global economic regime.

In order to understand “the dollar”, we must understand the history of the International Monetary system (IMS), all the way from the Bretton Woods accord, where the USD was granted prime reserve currency status, to the Nixon letdown, and, finally, the Global Financial Crisis. And no, I am not forgetting the 1985 Plaza accord in between but it is hardly relevant from a structural point of view.

Please bear with me for some background. The role of the dollar as the primary reserve currency begins at the BW summit, and it is essential to understand why the newly bred system was flawed from the very moment of its inception. Continue reading