Stock Week Ahead: Is The US Dollar In Danger?

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The United States may have the world’s most powerful military, but the dollar is its greatest weapon. Now, after nearly 80 years of dollar dominance, the United States may be in danger of losing its global reserve currency status.

About 60% of the $ 12.8 trillion in global foreign exchange reserves are currently held in dollars, giving the United States an exorbitant privilege over other countries. And that privilege pays off: Because U.S. government-backed debt is very attractive, interest rates are lower. The US is going to borrow from other countries in its own currency – so if the US dollar loses value, so does debt. US companies can make international transactions in dollars without having to pay conversion fees.

Perhaps most importantly, under extreme circumstances, the United States could cut off dollar access to central banks across the globe, isolate and drain their economies. Raghuram Rajan, the former governor of the Reserve Bank of India, calls this power a “weapon of economic mass destruction.”

The United States detonated this weapon on Russia in February after the country invaded Ukraine, froze $ 630 billion in foreign exchange reserves and deeply undermined the value of the ruble. It allowed America to punish Russia without getting American troops involved in war.

But with great power comes a great responsibility: When you use a weapon of mass destruction, even an economic one, people become frightened. To protect themselves from the same fate as Russia, other countries are diversifying their investments away from the US dollar to other currencies.

This is where the country’s status as a reserve currency can run into problems.

That arming the dollar, said Bank of America strategist Michael Hartnett, could lead to its degradation. “The Balkanization of global financial systems” erodes the United States’ role as a reserve currency, he added.

A new research paper from the International Monetary Fund found that the dollar share of international reserves has been declining for the past two decades, around the same time that the United States began its war on terror and its sanctions against terrorism. A quarter of the reserves have since shifted from the dollar to the Chinese yuan, and the other three quarters have moved into the currencies of smaller countries.

“These observations provide clues as to how the international system may develop going forward,” warned the newspaper’s co-authors, Serkan Arslanalp of the IMF, Barry Eichengreen of the University of California Berkeley and Chima Simpson-Bell also of the IMF.

Russia and China also hope to guide the development of the international system.

Russian President Vladimir Putin on Thursday threatened to stop gas exports to countries that do not open an account in a Russian bank and pay in rubles. The European Union gets about 40% of its gas and 30% of its oil from Russia without easy alternatives.

Saudi Arabia, meanwhile, is in talks with Beijing to accept the yuan instead of dollars for Chinese oil sales.

So is the king dollar being dethroned?

If the last two years have taught us anything, then it is that nothing is impossible. But the prospect of the United States losing its exorbitant privilege is highly unlikely.

First, the alternatives are not good. China has been pushing the yuan for years, and only about 3% of global transactions are carried out in the currency, compared to 40% for the dollar.

The United States is also still quite attractive to the rest of the globe. The US stock market is the largest and most liquid stock market in the world, and foreign capital is flowing into the country. Global foreign direct investment flows grew by 77% to an estimated $ 1.65 trillion in 2021, but investment in the United States increased by 114% to $ 323 billion, according to the UN Conference on Trade and Development.

Second quarter may not be fun, but we will at least be prepared for it.

The volatile first quarter of 2022 came to a bitter end this week with major stock indices posting their worst results in two years. Rising inflation, Russia’s invasion of Ukraine and an acceleration of the Federal Reserve’s rate hike plan created a number of unique challenges for investors.

These challenges will continue into the second quarter. But often the devil you know is better than the devil you do not.

We asked analysts what they predict will be the biggest headwind this quarter and how they are preparing for them. Here’s what we found.

Geopolitical unrest: Russia’s invasion of Ukraine has astonished markets across the globe. The geopolitical unrest has rippled through energy markets, commodities and even problems with food insecurity.

Josh Leonardi, director of prime services at TD Securities, looks at commodity markets where commodities are sold to hedge against the Russian conflict. He especially likes wheat. About a quarter of the world’s wheat supply comes from Russia and Ukraine. Future contracts for the crop are through the roof as supply becomes scarce but demand remains the same.

It is probably best not to invest in oil and energy, as these commodities have been particularly volatile and reactive to news updates.

Inflation: The U.S. is currently battling an inflation problem that it has not seen in 40 years, so it’s time to look at real assets as a hedge against inflation, Leonardi said. This means investing in raw materials, real estate, land, equipment and natural resources.

Interest in real estate investments is exploding, he said. “I do not know if anything is hotter on the market right now. You have everything from single- and multi-family houses to data centers to refrigeration facilities. ”

When investing in markets, look for companies that make money on rising inflation. Banks earn more as interest rates rise and they benefit from larger spreads. Companies with low capital requirements are also good bids.

Price increases: The Federal Reserve is likely to be aggressive in raising interest rates going forward, said Liz Anne Sonders, CEO and investment strategist at Charles Schwab.

Typically, investors believe in a security guard known as “The Fed put.” It is the notion that sufficient market weakness will cause the Fed to stop raising interest rates and tighten policy and perhaps even reverse and ease interest rates. Because inflation is so out of hand, there is no way it is going to happen this time around, Sonders said.

“Investors need to be aware of that, especially if they are more aggressive because they think the Fed will not fail the markets,” Sonders said. They will continue to raise interest rates and will do so to slow economic growth. This means that the risk of recession is higher than it would otherwise be.

Monday: US Motor Vehicle Sales for March Published by BLS; Investor Movement Index on Main Street Mood Published by TD Ameritrade

Tuesday: NY Fed President John Williams talks about the economy

Wednesday: FOMC minutes released at 14 ET

Thursday: Weekly applications for unemployment released

Friday: Eli Lilly reports earnings before the clock

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