Goodbye Dollar?
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Hi All,
Welcome back to the Market Wrap.
In a surprising turn of events this week, former US President Donald Trump has announced that he will turn himself in to New York prosecutors on Tuesday following his criminal indictment, rather than being taken in handcuffs. Meanwhile, the dominance of the US dollar in the global financial system is being challenged, by Putin's recent pledge to use the renminbi for payments and increasing uptake of the Chinese currency by other countries. In other news, consumer inflation is cooling in both Europe and the US, but sceptics warn that core inflation is still on the rise.
Enjoy!
Trouble for Trump
Donald Trump has declared that he will turn himself in to New York prosecutors on Tuesday as opposed to being forcibly detained following his criminal indictment. Trump’s indictment has been at the forefront of US politics, but he has sworn that his 2024 presidential campaign will not be stopped by any criminal proceedings, which do not legally prevent him from running for office.
The Republican party have broadly adopted Trumpian missives. Florida Governor and Trump’s biggest rival for the Republican nomination has accused Alan Bragg, the Manhattan District Attorney responsible for getting the grand jury of indicting Trump of having an ‘un-American political agenda’ against Trump. Republican Senator, Rand Paul, has called for Bragg’s arrest.
Although the full details of Trump’s indictment are not known, it is hard to imagine that there would be such widespread support among the Republican party for Trump if the charges were suspected to be more serious.
For such a controversial figure, public opinion hasn’t changed substantially on Trump since his inauguration as President in 2017. Political commentators point to the fact that potentially having a serial criminal as a presidential nominee should and historically would have been disastrous for any nominee – let alone the Republican nominee. But in this political era of hyper-partisanship, it has become apparent that in modern America all things may not be equal.
A New Reserve?
Since World War II, the US dollar has been the world’s reserve currency and since then it has never truly faced a substantial threat to its dominant position. Critics of the US dollar's dominance in the global financial system feel that it is over-reliant on the US dollar and that other markets should help to diversify this risk. China has notoriously had a closed nature in relation to its capital account, but President Xi Jinping has declared the ‘dare to fight’ approach on foreign policy this month.
Earlier this week, Putin pledged to use the renminbi for ‘payments between Russia and countries of Asia, Africa, and Latin America’. This could be potentially seen as an attempt to dislodge the US dollar as the world’s reserve currency. Putin’s promise is in correspondence with a wider uptake of the renminbi; with Brazil, India & Saudi Arabia playing their part in the increasing popularity and use of the renminbi.
The financial cocktail in the US, with the current banking mayhem; core inflation still increasing; and the potential of a debt ceiling crisis is making assets backed by the US dollar less attractive to investors, particularly those outside of the US. However, the US dollar is still the most ubiquitous global financial currency for a reason and has been for over three-quarters of a century, and it will take a lot to dethrone it as the most important global currency.
Consumption cooling
The decline in consumer inflation in both Europe and the US will give central bankers on both sides of the Atlantic some reassurance that their interest rate hikes are starting to yield success. The decline in consumer inflation is predominately due to a waning in energy prices. In the eurozone, consumer inflation decreased from 8.5% last month to 6.9% this month; the lowest that it has been since February 2022 (graph below).
Sceptics point to the fact that although consumer inflation is diminishing, core inflation is growing. Core inflation excludes the more volatile energy and food costs to give a more comprehensive view of underlying price pressures. It is speculated that as core inflation is still rising, it will encourage monetary policymakers to continue to increase interest rates in an effort to cool core inflation, which is ultimately more significant than the more commonly quoted consumer inflation.
UK inflation is an outlier to the widespread decline in consumer inflation, with inflation increasing by 0.3% this month to 10.4%. The unprecedented snowballing inflation in the UK is some much-unneeded news, with the Bank of England continuing to increase interest rates (currently 4.25%) for an eleventh month in a row, despite banking upheavals worldwide.
Source: Financial Times
Thanks for reading, have a goof week!
Oliver
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.