Weakening the dollar is the
last throw of the dice in rescuing the global economy, according to Saxo Bank’s
Steen Jakobsen.
In the online trading and
investment specialist’s outlook report for the fourth quarter, published
Thursday, Jakobsen said 2019 will most likely be remembered as the year that
kickstarted a global recession, despite the lowest ever nominal and real interest
rates.
“Monetary policy has reached the end of a very long road and has
proven a failure,” Jakobsen, who is the chief economist and CIO at Saxo Bank,
added.
The U.S. Federal Reserve in
September made a second 25 basis point cut to interest rates, moving to a
range of 1.75% to 2%. Its initial 25 basis point reduction in July was the
central bank’s first rate cut since the financial crisis.
The European Central Bank
(ECB), meanwhile, recently unveiled a package of measures to
reinvigorate the euro zone economy, cutting its deposit rate by 10 basis points
to -0.5% and launching a massive new quantitative easing (QE) program. A host
of other central banks across the world have also embarked on dovish
policy shifts.
Fears for the global economy
have been exacerbated of late by the weakest manufacturing data out of the U.S.
for over a decade, which compounded already fragile readings from across the
euro zone and beyond.
“In a global system of failed
monetary policies and a long and difficult path to fiscal policy, there is only
one other tool left in the box for the global economy and that is lower the
price of global money itself: the U.S. dollar,” Jakobsen said.
The outlook report pointed to
an estimated $240 trillion of debt worldwide, roughly 240% of global GDP, and
argued that too much of this debt is denominated in dollars, due to the
greenback’s role as global reserve currency and the deep liquidity of U.S.
capital markets.
This means the prospects for
all asset classes have become a function of U.S. dollar liquidity and
direction, Saxo Bank economists suggested.
“If the dollar rises too much,
the strain in the system increases: not only for U.S. exports, but also for the
emerging market with its high dependence on USD funding and export machines,”
Jakobsen said.
“Weakening the Killer Dollar
will likely put the final nail in the coffin of the grand credit cycle that
started in the early 1980s, when the U.S. balance sheet was reset, and the USD
was anchored by Volcker’s victory over inflation after Nixon abandoned the gold
standard in 1971.”
Paul Volcker was Chair of the
Fed between 1979 and 1987, and in 1980, he took the famously bold move of
almost doubling the Fed funds rate to its highest point in history to put an
end to double-digit inflation.
The cycle since then has been
“turbocharged by globalization” and “lending money into existence via offshore
USD creation,” the note added.
Saxo projected that a weaker
USD could buy some time for the global markets, adding that it would not offer
a structural solution, but represents the easiest quick fix and the one likely
to face the least political opposition.
U.S. President Donald Trump has
repeatedly chastised the Federal Reserve for what he perceives to be
insufficient action to weaken the dollar, disadvantaging the U.S.
In a tweet Tuesday, the
president wrote Fed Chair Jerome Powell and the central bank “have allowed the
Dollar to get so strong, especially relative to ALL other currencies, that our
manufacturers are being negatively affected.”
While market expectation is for
the Fed’s policy path to remain largely unchanged, the Trump administration is
likely to ramp up its pressure on the currency, Saxo analysts project.
Saxo Bank Head of FX Strategy
John Hardy highlighted that as foreign central banks have lost the ability and
willingness to accumulate USD reserves, they have increasingly sought funding
from domestic sources.
“U.S. savers’ and U.S. banks’
balance sheets simply can’t absorb the torrent of issuance. Something has to
give, and that something will be the Fed: whether it wants to or not,” Hardy
said.
He suggested that in Q4, the Fed will likely be forced to respond
in an increasingly substantial capacity to further liquidity provision, and the
Trump administration may even wrest control of policy.
“A heel-dragging Fed
and dark clouds gathering over the economic outlook almost ensures that the
Trump administration will be scrambling for the funding it needs to ensure
Trump’s re-election in 2020,” Hardy said.
Source: cnbc.com
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