I am on the road this week and next. This is going to be a short post.
A very good article was published recently by
I asked my Finance and Economics correspondent to contribute a short opinion about the topic discussed in this article:
Most foreign central banks hold reserves of other currencies in case they need to defend their domestic currency. In other words, the Chinese would use dollars or pounds to purchase Yuan to defend the price of the Yuan. In a similar fashion, the Bank of England could not use pounds to purchase pounds. They had to use their foreign currency reserves to try to push up the price of the pound and then ran out of other currencies to defend the pound.
In practice the US does not have enough of foreign currencies to defend the value of the dollar.
Currently, the Fed holds $20.65 billion in foreign exchange reserves and the Treasury holds another $20.63 billion in the Exchange Stabilization Fund (ESF).
Effectively, the only thing that it could do would be to raise interest rates so that people would sell other currencies for dollars and then deposit those dollars into higher yielding accounts because of the increased interest rates.
With the Fed's increases in interest rates, the US dollar generally appreciates.
The value of the US dollar, as measured by the dollar index (DXY), has increased by approximately 15.7% over the past two years. Specifically, the DXY increased from 90.5 in May 2022 to 104.7 in May 2024. This increase reflects the relative strength of the US dollar compared to a basket of other major currencies, including the Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, and Swedish Krona. It is worth noting that the DXY is a trade-weighted index, meaning that it gives more weight to currencies that are more important to US trade. The Euro, for example, makes up 57.6% of the index, while the Japanese Yen accounts for 13.6%.
It is true that the US Fed has massive mark-to-market losses on the bonds that it holds in its portfolio. It bought these bonds with magic money that it printed. As a result, it can print more magic money to cover any of the mark-to-market losses or hold the security to maturity and not realize the mark to market losses. If these mark-to-market losses were in currencies other than the dollar, we would have a more immediate problem.
Of course, this whole thing is a big confidence game, that could end very badly.
If there is a loss of faith in the currency, and a better alternative (that is equally liquid, transferable, and accepted) it would put pressure on the dollar.
Crazily, the US dollar has become to represent a larger share of global transactions in the last decade at the expense of the Euro and Japanese Yen. The Yuan has increased in trade volume (but still tiny) and the dollar represent a larger share of trade volume than ever as other Western currencies have eroded.
Crazy times...
I think the biggest (shorter term) risk is that inflation stays high (for a million reasons), they can't reduce interest rates, the economy stalls, interest expenses on debt pile up, etc...
Discuss in comments.
Art for today: Irises, watercolor, 8x8 in.
"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again . . . Take this great power away from them, and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit."
- Sir Josiah Stamp, Director of the Bank of England, 1927
Beautiful Iris! x
“If you have two loaves of bread, sell one and buy a hyacinth.”