 | We need to establish some ground rules first. All currencies are only measured against other currencies. Typically, when you see a currency exchange rate quoted, it is quoted as a measured against the USD. For example take the following. The above table shows the changes in each of these currencies against the USD in 2022. The "/USD" implies a change against the USD. If media mentions change in a currency, it usually is implied to be against the USD. Now, we have see across the board virtually all currencies falling against the dollar. Every piece of news media mentions the Indian Rupee, the Chinese Yuan, the Japanese Yen etc falling against the dollar but no one ever explains why. Well the USD is the world reserve currency. Everyone likes to make the statement but no one explains what it really means. Per the IMF, 40% of the world's debt is issued in USD. Per the BIS, 88% of forex trades were between the U.S. dollar and another currency. Per the IMF again, 60% of known Central Bank reserves are in the USD. Now, the economy of virtually every country is tied to that of every other country. That is to say we have a global synchronized economy. Gone are the days were a country provided for all its needs within its own borders. Countries are dependent on other countries, and these other countries are dependent on yet other countries. This means that if one country falls, they are all affected, of course to varying degrees depending on the level of inter-dependence. To illustrate this level of dependence, the World Bank currently has the % of imports per GDP globally at 28.1%. So we have established two things. Countries globally are heavily dependent on the USD and also on each other to varying degrees. Now with all this USD dependence for trade, what would happen if the US Central Bank, the Federal Reserve suddenly started raising rates. Well, higher rates means less people are willing to borrow USD and less borrowers of USD means less USD in the global economy.Take a look at the graph below. This graph shows real GDP, the total value of goods and services produces in a country adjusted for inflation. Basically, when we remove the effects of inflation, the trade in US economy has been faltering since the fourth quarter of 2021. This is coincidentally when the Federal Reserve started raising rates. Because the global economy is dependent of USD, as we established before, this chart of effective US trade is a good estimate for global trade. So now the main question: why are we seeing currencies fall against the USD. You probably have an idea by now. It is because we are experiencing a US dollar shortage. Let me erase any doubt. The thing is it is now all about interest rates. Above we see two graphs. There is one of US Treasury Supply and the other of Demand. Treasuries are essentially loans firms or individuals provide to the US government. You can think of US treasuries as futures dollars as you may lend the US government 1 million today and you will be paid back say 1.05 million in one year. The charts show the demand for these future dollars or treasuries has shot up this year, while the issuance or supply of treasuries has gone down. Which can only mean that the price or value of dollars must go waayyy up. So other countries must now pay much more to get USD to be able to trade, and must run government deficits, that is borrow money, to do so which increases inflation and further decreases the currency's value relative to the USD. The tl;dr is the world is experiencing a double whammy of a global USD dollar shortage that is hampering global trade and crushing the value of other currencies relative to the USD, as well as a shortage of US treasuries which feeds the same problem. Countries are printing more currency to pay for more expensive dollars which is further decreasing their currency's value. Such is the real power the US Federal Reserve and the Treasury Department holds. [link] [comments] |
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