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De-dollarisation: India & UAE make landmark move to settle oil transactions in national currencies – WION
- De-dollarisation: India & UAE make landmark move to settle oil transactions in national currencies WION
- Dedollarization: India Uses Rupees to Buy Oil From the UAE Markets Insider
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Saudi Arabia just said they are now ‘open’ to the idea of trading in currencies besides the US dollar — does this spell doom for the greenback? 3 reasons not to worry
The 2023 World Economic Forum has been going on for just a few days and we’re already getting a glimpse of the future the global elites envision for us all.
Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, stunned reporters in Davos when he expressed that the oil-rich nation was open to trading in currencies beside the U.S. dollar for the first time in 48 years.
“There are no issues with discussing how we settle our trade arrangements, whether it’s in the U.S. dollar, the euro, or the Saudi riyal,” Al-Jadaan said.
His comments are the latest signal that powerful nations across the world are plotting a “de-dollarization” of the global economy.
Here’s why replacing the dollar is gaining popularity and why dethroning the greenback is easier said than done.
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Rebellion against the dollar
The dollar’s dominance of global trade and capital flows dates back at least 80 years. Over the last eight decades, the U.S. has been the world’s largest economy, most influential political entity and most powerful military force.
However, economists from other countries are increasingly worried that the country has “weaponized” this position of power in recent years, according to the CBC. The U.S. implements sanctions to punish countries in conflict, threatens to devalue its own currency to win trade wars and leverages it to support its own economy at the expense of the rest of the world.
Unsurprisingly, these moves have inspired a backlash from China, Russia and other prominent countries.
At the 14th BRICS Summit last year, Russian President Vladimir Putin announced measures to create a new “international currency standard.” Meanwhile, China has been urging oil producers and major exporters to accept yuan for payments.
This rebellion against the U.S. dollar could erode some of its influence, but there are reasons to believe the greenback’s dominance will be sustained.
Replacing the dollar would be hard
The U.S. dollar’s dominance is underappreciated. As of late-2022, the greenback accounts for 59.79% of total foreign reserves. In comparison, the Euro accounts for 19.66%, while the Chinese renminbi accounts for just 2.76% of global reserves.
China could expand its market share by twenty-fold and still lag the U.S. dollar by a wide margin.
Put simply, replacing the U.S. dollar in foreign reserves is easier said than done.
READ MORE: 4 simple ways to protect your money against white-hot inflation (without being a stock market genius)
Other countries have a lot of catching up
Reserve currency status is closely correlated with the size of the issuing country’s economy. In other words, the largest economy usually has the reserve currency status.
During the 19th century, the British pound was the world’s reserve currency because the British Empire’s colonies needed it for trade and commerce. For the past century, the U.S. dollar has dominated because the American economy is the largest by far.
China’s growth has slowed down in recent years and some believe it will never overtake the U.S. Meanwhile, Russia was the 11th largest economy before it invaded Ukraine, despite being economically smaller in size than California or Texas alone.
And India is growing rapidly, but it would need to grow 628% to match the U.S.’s GDP today. That could take 25 years.
America’s economic lead is simply insurmountable.
The U.S. will still be OK
The final reason Americans shouldn’t be worried about the dollar losing influence is that the worst-case scenario isn’t so bad. Some analysts believe that the future could be more multilateral.
The U.S. may lose influence in some segments of the global economy but not lose dominance everywhere. For instance, the Chinese yuan could become more important for trade and cross-border payments, but the dollar could remain the preferred reserve currency for central banks of developed nations.
That’s far from an economic nightmare for Americans.
What to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
When China and Saudi Arabia meet, nothing matters more than oil
Hong Kong
CNN
—
Chinese leader Xi Jinping is visiting Saudi Arabia this week for the first time in nearly seven years, during which he signed a comprehensive strategic partnership with the world’s largest oil exporter and met leaders from across the Middle East.
The visit is a sign that China and the Gulf region are deepening their economic relations at a time when US-Saudi ties have crumbled over OPEC’s decision to slash crude oil supply. As Xi wrote in an article published in Saudi media, the trip was intended to strengthen China’s relations with the Arab world.
The partnership agreement signed by the two sides includes a number of deals and memoranda of understanding, such as on hydrogen energy and enhancing coordination between the kingdom’s Vision 2030 and China’s Belt and Road Initiative, according to the official Saudi Press Agency (SPA). It did not provide specific details.
China is Saudi Arabia’s biggest trading partner and a source of growing investment. It’s also the world’s biggest buyer of oil. Saudi Arabia is China’s largest trading partner in the Middle East and the top global supplier of crude oil.
“Energy cooperation will be at the center of all discussions between the Saudi-Chinese leadership,” said Ayham Kamel, head of Eurasia Group’s Middle East and North Africa research team. “There is great recognition of the need to build a framework to ensure that this interdependence is accommodated politically, especially given the scope of energy transition in the West.”
Governments around the world have committed to drastically cutting carbon emissions over the coming decades. Countries such as Canada and Germany have doubled down on renewable energy investments to expedite their transition to net-zero economies.
The United States has significantly increased domestic oil and gas output since the 2000s, while accelerating its transition to clean energy.
The Russian invasion of Ukraine in February has triggered a global energy crisis that has left all countries racing to shore up supplies. And the West has further scrambled the oil markets by slapping an embargo and price cap on the world’s second biggest exporter of crude.
Energy security has also increasingly become a key priority for China, which is facing significant challenges of its own.
Last year, bilateral trade between Saudi Arabia and China hit $87.3 billion, up 30% from 2020, according to Chinese customs figures.
Much of the trade was focused on oil. China’s crude imports from Saudi Arabia stood at $43.9 billion in 2021, accounting for 77% of its total goods imports from the kingdom. That amount also makes up more than a quarter of Saudi Arabia’s total crude exports.
“Stability of energy supplies, in terms of both prices and quantities, is a key priority for Xi Jinping as the Chinese economy remains heavily reliant on oil and natural gas imports,” said Eswar Prasad, a professor of trade policy at Cornell University.
The world’s second largest economy is heavily reliant on foreign oil and gas. 72% of its oil consumption was imported last year, according to official figures. 44% of natural gas demand was also from overseas.
At the 20th Party Congress in October, Xi stressed that ensuring energy security was a key priority. The comments came after a spate of severe power shortages and soaring global energy prices following Russia’s invasion of Ukraine.
As the West shunned Russian crude in the months that followed the invasion, China took advantage of Moscow’s desperate search for new buyers. Between May and July, Russia was China’s No. 1 oil supplier, until Saudi Arabia regained the top spot in August.
“Diversity is a key ingredient for China’s long-term energy security because it cannot afford to put all of its eggs in one basket and turn itself into a captive of another power’s energy and geostrategic interests,” said Ahmed Aboudouh, a nonresident fellow with the Middle East Programs at the Atlantic Council, a research institute based in DC.
“Although Russia is a source of cheaper supply chains, nobody can guarantee, with utmost certainty, that the China and Russia relationship will continue to shore up 50 years from now,” Aboudouh said.
The Saudi Press Agency cited Saudi energy minister Prince Abdulaziz bin Salman as saying Wednesday that the kingdom would remain China’s “credible and reliable partner in this field.”
Saudi Arabia also has strong motivations to deepen energy ties with China, according to Gal Luft, co-director of the Institute for the Analysis of Global Security.
“The Saudis are concerned about losing market share in China in the face of a tsunami of heavily discounted Russian and Iranian crude,” he said. “Their goal is to ensure China remains a loyal customer even when the competitors offer [a] cheaper product.”
Oil prices have fallen back to where they were before the Ukraine war on fears of a sharp global economic slowdown. The extent to which the Chinese economy can pick up pace next year will have a huge bearing on how bad that slump will be.
Beyond security of supply, Saudi Arabia could offer Beijing another prize with bigger geopolitical ramifications.
Riyadh has been in talks with Beijing to price some of its oil sales to China in the Chinese currency, the yuan, rather than the US dollar, according to a Wall Street Journal report. Such a deal could be a boost to Beijing’s ambitions to expand the Chinese currency’s global influence.
It would also hurt the long-standing agreement between Saudi Arabia and the United States that requires Saudi Arabia to sell its oil only for US dollars and to hold its reserves partly in US Treasuries, all in return for US security guarantees. The “petrodollar system” has helped preserve the dollar’s status as the top global reserve currency and payment medium for oil and other commodities.
Although Beijing and Riyadh never confirmed the reported talks, analysts said it was logical that the two sides would be exploring the possibility.
“In the near future, Saudi Arabia could sell some of its oil and receive revenues in Chinese yuan, which makes economic sense as China is the kingdom’s top trading partner,” said Naser Al Tamimi, senior associate research fellow at ISPI, an Italian think tank on international affairs.
Some believe it’s already happening, but that neither China nor the Saudis want to highlight it publicly.
“They know too well how sensitive this issue [is] for the United States,” said Luft. “Both parties are overexposed to the US currency and there is no reason for them to continue to conduct their bilateral trade in a third party’s currency, especially when this third party is no longer a friend of either.”
Xi’s visit could mark another step “in the erosion of the dollar’s status” as reserve currency, he added.
Nonetheless, there are limits to the growing ties between Riyadh and Beijing.
“The Biden administration’s approach to the Middle East has concerned the Saudis, and they see a growing relationship with China as a hedge against potential US abandonment and a tool for leverage in negotiations with the United States,” said Jon B. Alterman, director of the Middle East Program at the Center for Strategic and International Studies, a Washington DC-based think tank.
The Biden administration has reoriented its policy priorities with a focus on countering China. At the same time, it has indicated its intention to downsize its own presence in the Middle East, sparking worries among allies there that the United States may not be as committed to the region as it used to be.
“All that being said, Chinese-Saudi ties pale in both depth and complexity to Saudi-US ties,” Alterman said. “The Chinese remain a novelty to most Saudis, and they are additive. The United States is foundational to how Saudis see the world, and how they have seen it for 75 years.”
Despite the possibility of shifting to yuan transactions, it’s too early to say Saudi Arabia would ditch the dollar in pricing its oil sales, analysts said.
Eurasia Group’s Kamal believes it’s “highly unlikely” that Saudi Arabia would take such a step, unless there is an implosion on the US-Saudi relationship.
“In essence there could be discussion on pricing of barrels to China in yuan, but this would be limited in size and probably only correspond to bilateral trade volumes,” he said.
Prasad from Cornell University said countries like China, Russia, and Saudi Arabia are all eager to reduce their dependence on the dollar for oil contracts and other cross-border transactions.
“However, in the absence of serious alternatives and with few international investors willing to place their trust in these countries’ financial markets and their governments, the dollar’s dominant role in global finance is hardly under serious threat,” he said.
China markets tank as protests erupt over Covid lockdowns
Hong Kong
CNN Business
—
China’s major stock indices and its currency have opened sharply lower Monday, as widespread protests against the country’s stringent Covid-19 restrictions over the weekend roiled investor sentiment.
Hong Kong’s Hang Seng
(HSI) Index fell as much as 4.2% in early trading. It has since pared some losses and last traded 2% lower. The Hang Seng
(HSI) China Enterprises Index, a key index that tracks the performance of mainland Chinese companies listed in Hong Kong, lost 2%.
In mainland China, the benchmark Shanghai Composite briefly fell 2.2%, before trimming losses to 0.9% lower than Friday’s close. The tech-heavy Shenzhen Component Index dropped 1.1%.
The Chinese yuan, also known as the renminbi, plunged against the US dollar on Monday morning. The onshore yuan, which trades in the tightly controlled domestic market, briefly weakened 0.9%. It was last down 0.6% at 7.206 per dollar. The offshore rate, which trades overseas, dropped 0.3% to 7.212 per dollar.
The plunging yuan suggests that “investors are running ice cold on China,” said Stephen Innes, managing partner of SPI Asset Management, adding that the currency market might be “the simplest barometer” to gauge what domestic and overseas investors think.
The markets tumble comes after protests erupted across China in an unprecedented show of defiance against the country’s stringent and increasingly costly zero-Covid policy.
In the country’s biggest cities, from the financial hub of Shanghai to the capital Beijing, residents gathered over the weekend to mourn the dead from a fire in Xinjiang, speak out against zero-Covid and call for freedom and democracy.
Such widespread scenes of anger and defiance, some of which stretched into the early hours of Monday morning, are exceptionally rare in China.
Asian markets were also broadly lower. South Korea’s Kospi lost 1%, Japan’s Nikkei 225
(N225) shed 0.6%, and Australia’s S&P/ASX 200 fell by 0.3%.
US stock futures — an indication of how markets are likely to open — fell, with Dow futures down 0.5%, or 171 points. Futures for the S&P 500 were down 0.7%, while futures for the Nasdaq dropped 0.8%.
Oil prices also dropped sharply, with investors concerned that surging Covid cases and protests in China may sap demand from one of the world’s largest oil consumers. US crude futures fell 2.7% to trade at $74.19 a barrel. Brent crude, the global oil benchmark, lost 2.6% to $81.5 per barrel.
On Friday, a day before the protests started, China’s central bank cut the amount of cash that lenders must hold in reserve for the second time this year. The reserve requirement ratio for most banks (RRR) was reduced by 25 percentage points.
The move was aimed at propping up an economy that had been crippled by strict Covid restrictions and an ailing property market. But analysts don’t think the move will have a significant impact.
“Cutting the RRR now is just like pushing on a string, as we believe the real hurdle for the economy is the pandemic rather than insufficient loanable funds,” said analysts from Nomura in a research report released Monday.
“In our view, ending the pandemic [measures] as soon as possible is the key to the recovery in credit demand and economic growth,” they said.
Innes from SPI Asset Management said China’s economy is currently caught in the midst of a tug-of-war between weakening economic fundamentals and increasing reopening hopes.
“For China’s official institutions, there are no easy paths. Accelerating reopening plans when new Covid cases are rising is unlikely, given the low vaccination coverage of the elderly,” he said. “Mass protests would deeply tilt the scales in favor of an even weaker economy and likely be accompanied by a massive surge in Covid cases, leaving policymakers with a considerable dilemma.”
In the near term, he said, Chinese equities and currency will likely price in “more significant uncertainty” around Beijing’s reaction to the ongoing protests. He expects social discontent could increase in China over the coming months, testing policymakers’ resolve to stick to its draconian zero-Covid mandates.
But in the longer term, the more pragmatic and likely outcome should be “a quicker loosening of [Covid] restrictions once the current wave subsides,” he said.
Foxconn protests: iPhone factory offers to pay its workers to quit and leave Zhengzhou campus
Hong Kong
CNN Business
—
Foxconn has offered to pay newly recruited workers 10,000 yuan ($1,400) to quit and leave the world’s largest iPhone assembly factory, in an attempt to quell protests that saw hundreds clash with security forces at the compound in central China.
The Apple supplier made the offer Wednesday following dramatic scenes of violent protests on its campus in Zhengzhou, the capital of Henan province, in a text message sent from its human resources department to workers.
In the message, seen by CNN, the company urged workers to “please return to your dormitories” on the campus. It also promised to pay them 8.000 yuan if they agreed to quit Foxconn, and another 2,000 yuan after they board buses to leave the sprawling site altogether.
The protest erupted on Tuesday night over the terms of the new hires’ payment packages and Covid-related concerns about their living conditions. Scenes turned increasingly violent on Wednesday as workers clashed with a large number of security forces, including SWAT team officers.
Videos circulating on social media showed groups of law enforcement officers clad in hazmat suits kicking and hitting protesters with batons and metal rods. Some workers were seen tearing down fences, throwing bottles and barriers at officers and smashing and overturning police vehicles.
The protest largely tailed off around 10 p.m. on Wednesday as workers returned to their dormitories, having received Foxconn’s payment offer and fearing a harsher crackdown by authorities, a witness told CNN.
The Zhengzhou plant was hit by a Covid outbreak in October, which forced it to lock down and led to a mass exodus of workers fleeing the outbreak. Foxconn later launched a massive recruitment drive, in which more than 100,000 people signed up to fill the advertised positions, Chinese state media reported.
According to a document setting out the salary package of new hires seen by CNN, the workers were promised a 3,000 yuan bonus after 30 days on the job, with another 3,000 yuan to be paid after a total of 60 days.
However, according to a worker, after arriving at the plant, the new recruits were told by Foxconn that they would only receive the first bonus on March 15, and the second installment in May – meaning they must work through the Lunar New Year holiday, which starts in January 2023, to get the first of the bonus payments.
“The new recruits had to work more days to get the bonus they were promised, so they felt cheated,” the worker told CNN.
In a statement Thursday, Foxconn said it fully understood the new recruits’ concerns about “possible changes in the subsidy policy,” which it blamed on “a technical error (that) occurred during the onboarding process.”
“We apologize for an input error in the computer system and guarantee that the actual pay is the same as agreed,” it said.
Foxconn was communicating with employees and assuring them that salaries and bonuses would be paid “in accordance with company policies,” it said.
Apple, for which Foxconn manufactures a range of products, told CNN Business that its employees were on the ground at the Zhengzhou facility.
“We are reviewing the situation and working closely with Foxconn to ensure their employees’ concerns are addressed,” it said in a statement.
On Thursday morning, some workers who had agreed to leave had received the first part of the payment, a worker said in a livestream, which showed workers lining up outdoors to take Covid tests while they waited for departing buses. Later in the day, livestreams showed long lines of workers boarding buses.
But for some, the trouble is far from over. After being driven to the Zhengzhou train station, many couldn’t get a ticket home, another worker said in a livestream on Thursday afternoon. Like him, thousands of workers were stuck at the station, he said, as he turned his camera to show the large crowds.
Zhengzhou is set to impose a five-day lockdown in its urban districts, which include the train station, starting from midnight Friday, authorities had announced earlier.
The protest started outside the workers’ dormitories on the sprawling Foxconn campus on Tuesday night, with hundreds marching and chanting slogans including “Down with Foxconn,” according to social media videos and a witness account. Videos showed workers clashing with security guards and fighting back tear gas fired by police.
The stand-off lasted into Wednesday morning. The situation quickly escalated when a large number of security forces, most covered in white hazmat suits and some holding shields and batons, were deployed to the scene. Videos showed columns of police vehicles, some marked with “SWAT,” arriving on the campus, normally home to some 200,000 workers.
More workers joined the protest after seeing livestreams on video platforms Kuaishou and Douyin, the Chinese version of TikTok, the worker told CNN. Many livestreams were cut or censored. Online searches for “Foxconn” in Chinese have been restricted.
Some protesters marched to the main gate of the production facility compound, which is located in a separate area from the workers’ dorms, in an attempt to block assembly work, the worker said.
Other protesters took the further step of breaking into the production compound. They smashed Covid testing booths, glass doors and advertising boards at restaurants in the production area, according to the worker.
Having worked at the Zhengzhou plant for six years, he said he was now deeply disappointed by Foxconn and planned to quit. With a baseline monthly salary of 2,300 yuan, he has been earning between 4,000 yuan to 5,000 yuan per month, including overtime pay, working 10 hours a day and seven days a week during the pandemic.
“Foxconn is a Taiwanese company,” he said. “Not only did it not spread Taiwan’s values of democracy and freedom to the mainland, it was assimilated by the Chinese Communist Party and became so cruel and inhumane. I feel very sad about it.”
Although he was not one of the new recruits, he protested with them in support, adding: “If today I remain silent about the suffering of others, who will speak out for me tomorrow?”
China GDP: Hong Kong stocks plunge 6% as fears about Xi’s third term trump data
Hong Kong
CNN Business
—
Hong Kong stocks had their worst day since the 2008 global financial crisis, just a day after Chinese leader Xi Jinping secured his iron grip on power at a major political gathering.
Foreign investors spooked by the outcome of the Communist Party’s leadership reshuffle dumped Chinese equities and the yuan despite the release of stronger-than-expected GDP data. They’re worried that Xi’s tightening grip on power will lead to the continuation of Beijing’s existing policies and further dent the economy.
Hong Kong’s benchmark Hang Seng
(HSI) Index plunged 6.4% on Monday, marking its biggest daily drop since November 2008. The index closed at its lowest level since April 2009.
The Chinese yuan weakened sharply, hitting a fresh 14-year low against the US dollar on the onshore market. On the offshore market, where it can trade more freely, the currency tumbled 0.8%, hovering near its weakest level on record, even as the Chinese economy grew 3.9% in the third quarter from a year ago, according to the National Bureau of Statistics. Economists polled by Reuters had expected growth of 3.4%.
The sharp sell-off came one day after the ruling Communist Party unveiled its new leadership for the next five years. In addition to securing an unprecedented third term as party chief, Xi packed his new leadership team with staunch loyalists.
A number of senior officials who have backed market reforms and opening up the economy were missing from the new top team, stirring concerns about the future direction of the country and its relations with the United States. Those pushed aside included Premier Li Keqiang, Vice Premier Liu He, and central bank governor Yi Gang.
“It appears that the leadership reshuffle spooked foreign investors to offload their Chinese investment, sparking heavy sell-offs in Hong Kong-listed Chinese equities,” said Ken Cheung, chief Asian forex strategist at Mizuho bank.
The GDP data marked a pick-up from the 0.4% increase in the second quarter, when China’s economy was battered by widespread Covid lockdowns. Shanghai, the nation’s financial center and a key global trade hub, was shut down for two months in April and May. But the growth rate was still below the annual official target that the government set earlier this year.
“The outlook remains gloomy,” said Julian Evans-Pritchard, senior China economist for Capital Economics, in a research report on Monday.
“There is no prospect of China lifting its zero-Covid policy in the near future, and we don’t expect any meaningful relaxation before 2024,” he added.
Coupled with a further weakening in the global economy and a persistent slump in China’s real estate, all the headwinds will continue to pressure the Chinese economy, he said.
Evans-Pritchard expected China’s official GDP to grow by only 2.5% this year and by 3.5% in 2023.
Monday’s GDP data were initially scheduled for release on October 18 during the Chinese Communist Party’s congress, but were postponed without explanation.
The possibility that policies such as zero-Covid, which has resulted in sweeping lockdowns to contain the virus, and “Common Prosperity” — Xi’s bid to redistribute wealth — could be escalated was causing concern, Cheung said.
“With the Politburo Standing Committee composed of President Xi’s close allies, market participants read the implications as President Xi’s power consolidation and the policy continuation,” he added.
Mitul Kotecha, head of emerging markets strategy at TD Securities, also pointed out that the disappearance of pro-reform officials from the new leadership bodes ill for the future of China’s private sector.
“The departure of perceived pro-stimulus officials and reformers from the Politburo Standing Committee and replacement with allies of Xi, suggests that ‘Common Prosperity’ will be the overriding push of officials,” Kotecha said.
Under the banner of the “Common Prosperity” campaign, Beijing launched a sweeping crackdown on the country’s private enterprise, which shook almost every industry to its core.
“The [market] reaction in our view is consistent with the reduced prospects of significant stimulus or changes to zero-Covid policy. Overall, prospects of a re-acceleration of growth are limited,” Kotecha said.
On the tightly controlled domestic market in China, the benchmark Shanghai Composite Index dropped 2%. The tech-heavy Shenzhen Component Index lost 2.1%.
The Hang Seng Tech Index, which tracks the 30 largest technology firms listed in Hong Kong, plunged 9.7%.
Shares of Alibaba
(BABA) and Tencent
(TCEHY) — the crown jewels of China’s technology sector — both plummeted more than 11%, wiping a combined $54 billion off their stock market value.
The sell-off spilled over into the United States as well. Shares of Alibaba and several other leading Chinese stocks trading in New York, such as EV companies Nio
(NIO) and Xpeng, Alibaba rivals JD.com
(JD) and Pinduoduo
(PDD) and search engine Baidu
(BIDU), were all down sharply.
5 signs the world is headed for a recession
New York
CNN Business
—
Around the world, markets are flashing warning signs that the global economy is teetering on a cliff’s edge.
The question of a recession is no longer if, but when.
Over the past week, the pulse of those flashing red lights quickened as markets grappled with the reality — once speculative, now certain — that the Federal Reserve will press on with its most aggressive monetary tightening campaign in decades to wring inflation from the US economy. Even if that means triggering a recession. And even if it comes at the expense of consumers and businesses far beyond US borders.
There’s now a 98% chance of a global recession, according to research firm Ned Davis, which brings some sobering historical credibility to the table. The firm’s recession probability reading has only been this high twice before — in 2008 and 2020.
When economists warn of a downturn, they’re typically basing their assessment on a variety of indicators.
Let’s unpack five key trends:
The US dollar plays an outsized role in the global economy and international finance. And right now, it is stronger than it’s been in two decades.
The simplest explanation comes back to the Fed.
When the US central bank raises interest rates, as it has been doing since March, it makes the dollar more appealing to investors around the world.
In any economic climate, the dollar is seen as a safe place to park your money. In a tumultuous climate — a global pandemic, say, or a war in Eastern Europe — investors have even more incentive to purchase dollars, usually in the form of US government bonds.
While a strong dollar is a nice perk for Americans traveling abroad, it creates headaches for just about everyone else.
The value of the UK pound, the euro, China’s yuan and Japan’s yen, among many others, has tumbled. That makes it more expensive for those nations to import essential items like food and fuel.
In response, central banks that are already fighting pandemic-induced inflation wind up raising rates higher and faster to shore up the value of their own currencies.
The dollar’s strength also creates destabilizing effects for Wall Street, as many of the S&P 500 companies do business around the world. By one estimate from Morgan Stanley, each 1% rise in the dollar index has a negative 0.5% impact on S&P 500 earnings.
The No. 1 driver of the world’s largest economy is shopping. And America’s shoppers are tired.
After more than a year of rising prices on just about everything, with wages not keeping up, consumers have pulled back.
“The hardship caused by inflation means that consumers are dipping into their savings,” EY Parthenon Chief Economist Gregory Daco said in a note Friday. The personal saving rate in August remained unchanged at only 3.5%, Daco said — near its lowest rate since 2008, and well below its pre-Covid level of around 9%.
Once again, the reason behind the pullback has a lot to do with the Fed.
Interest rates have risen at a historic pace, pushing mortgage rates to their highest level in more than a decade and making it harder for businesses to grow. Eventually, the Fed’s rate hikes should broadly bring costs down. But in the meantime, consumers are getting a one-two punch of high borrowing rates and high prices, especially when it comes to necessities like food and housing.
Americans opened their wallets during the 2020 lockdowns, which powered the economy out of its brief-but-severe pandemic recession. Since then, government aid has evaporated and inflation has taken root, pushing prices up at their fastest rate in 40 years and sapping consumers’ spending power.
Business has been booming across industries for the bulk of the pandemic era, even with historically high inflation eating into profits. That is thanks (once again) to the tenacity of American shoppers, as businesses were largely able to pass on their higher costs to consumers to cushion profit margins.
But the earnings bonanza may not last.
In mid-September, one company whose fortunes serve as a kind of economic bellwether gave investors a shock.
FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand was softening, and earnings were likely to plunge more than 40%.
In an interview, its CEO was asked whether he believes the slowdown was a sign of a looming global recession.
“I think so,” he responded. “These numbers, they don’t portend very well.”
FedEx isn’t alone. On Tuesday, Apple’s stock fell after Bloomberg reported the company was scrapping plans to increase iPhone 14 production after demand came in below expectations.
And just ahead of the holiday season, when employers would normally ramp up hiring, the mood is now more cautious.
“We’ve not seen the normal September uptick in companies posting for temporary help,” said Julia Pollak, chief economist at ZipRecruiter. “Companies are hanging back and waiting to see what conditions hold.”
Wall Street has been hit with whiplash, and stocks are now on track for their worst year since 2008 — in case anyone needs yet another scary historical comparison.
But last year was a very different story. Equity markets thrived in 2021, with the S&P 500 soaring 27%, thanks to a torrent of cash pumped in by the Federal Reserve, which unleashed a double-barreled monetary-easing policy in the spring of 2020 to keep financial markets from crumbling.
The party lasted until early 2022. But as inflation set in, the Fed began to take away the proverbial punch bowl, raising interest rates and unwinding its bond-buying mechanism that had propped up the market.
The hangover has been brutal. The S&P 500, the broadest measure of Wall Street — and the index responsible for the bulk of Americans’ 401(k)s — is down nearly 24% for the year. And it’s not alone. All three major US indexes are in bear markets — down at least 20% from their most recent highs.
In an unfortunate twist, bond markets, typically a safe haven for investors when stocks and other assets decline, are also in a tailspin.
Once again, blame the Fed.
Inflation, along with the steep rise in interest rates by the central bank, has pushed bond prices down, which causes bond yields (aka the return an investor gets for their loan to the government) to go up.
On Wednesday, the yield on the 10-year US Treasury briefly surpassed 4%, hitting its highest level in 14 years. That surge was followed by a steep drop in response to the Bank of England’s intervention in its own spiraling bond market — amounting to tectonic moves in a corner of the financial world that is designed to be steady, if not downright boring.
European bond yields are also spiking as central banks follow the Fed’s lead in raising rates to shore up their own currencies.
Bottom line: There are few safe places for investors to put their money right now, and that’s unlikely to change until global inflation gets under control and central banks loosen their grips.
Nowhere is the collision of economic, financial, and political calamities more painfully visible than in the United Kingdom.
Like the rest of the world, the UK has struggled with surging prices that are largely attributable to the colossal shock of Covid-19, followed by the trade disruptions created by Russia’s invasion of Ukraine. As the West cut off imports of Russian natural gas, energy prices have soared and supplies have dwindled.
Those events were bad enough on their own.
But then, just over a week ago, the freshly installed government of Prime Minister Liz Truss announced a sweeping tax-cut plan that economists from both ends of the political spectrum have decried as unorthodox at best, diabolical at worst.
In short, the Truss administration said it would slash taxes for all Britons to encourage spending and investment and, in theory, soften the blow of a recession. But the tax cuts aren’t funded, which means the government must take on debt to finance them.
That decision set off a panic in financial markets and put Downing Street in a standoff with its independent central bank, the Bank of England. Investors around the world sold off UK bonds in droves, plunging the pound to its lowest level against the dollar in nearly 230 years. As in, since 1792, when Congress made the US dollar legal tender.
The BOE staged an emergency intervention to buy up UK bonds on Wednesday and restore order in financial markets. It stemmed the bleeding, for now. But the ripple effects of the Trussonomics turmoil is spreading far beyond the offices of bond traders.
Britons, who are already in a cost-of-living crisis, with inflation at 10% — the highest of any G7 economy — are now panicking over higher borrowing costs that could force millions of homeowners’ monthly mortgage payments to go up by hundreds or even thousands of pounds.
While the consensus is that a global recession is likely sometime in 2023, it’s impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the 2007-09 Great Recession, but every recession is, of course, painful.
Some economies, particularly the United States, with its strong labor market and resilient consumers, will be able to withstand the blow better than others.
“We are in uncharted waters in the months ahead,” wrote economists at the World Economic Forum in a report this week.
“The immediate outlook for the global economy and for much of the world’s population is dark,” they continued, adding that the challenges “will test the resilience of economies and societies and exact a punishing human toll.”
But there are some silver linings, they said. Crises force transformations that can ultimately improve standards of living and make economies stronger.
“Businesses have to change. This has been the story since the pandemic started,” said Rima Bhatia, an economic adviser for Gulf International Bank. “Businesses no longer can continue on the path that they were at. That’s the opportunity and that’s the silver lining.”
— CNN Business’ Julia Horowitz, Anna Cooban, Mark Thompson, Matt Egan and Chris Isidore contributed reporting.
British pound plummets to record low against the dollar
CNN Business
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The British pound fell to a new record low against the US dollar of $1.035 on Monday, plummeting more than 4%.
The slide came as trading opened in Asia and Australia on Monday, extending a 2.6% dive from Friday — and spurring predictions the pound could plunge to parity with the US dollar in the coming months.
The unprecedented currency slump follows British Chancellor of the Exchequer Kwasi Kwarteng’s announcement on Friday that the United Kingdom would impose the biggest tax cuts in 50 years at the same time as boosting spending.
The new tax-slashing fiscal measures, which include scrapping plans for rising corporation tax and slashing the cap on bankers’ bonuses, have been criticized as “trickle-down economics” by the opposition Labour party and even lambasted by members of the Chancellor’s own Conservative party.
Former Tory chancellor Lord Ken Clarke criticized the tax cuts on Sunday, saying it could lead to the collapse of the pound.
“I’m afraid that’s the kind of thing that’s usually tried in Latin American countries without success,” Clarke said in an interview with BBC radio.
The pound has been hammered by a string of weak economic data, but also the steep ascent of the US dollar, a safe haven investment that sees inflows in times of uncertainty.
The euro also hit a 20-year low of 0.964 per dollar.
But the economic outlook in the UK means the pound is suffering more than most, in the face of a disastrous energy crunch and the highest inflation among G7 nations.
The previous record low for the British pound against the US dollar was 37 years ago on February 25, 1985, when 1 pound was worth $1.054.
“Should there be any escalation to the war in Ukraine…we would see further sharp downside in the Pound as well as the Euro,” said Clifford Bennett, chief economist at ACY Securities, an Australian brokerage firm.
“One should not underestimate the crisis that is all of Europe at the moment and the Pound is more vulnerable than most,” he said.
The soaring US dollar also sent major Asian currencies tumbling on Monday.
China’s yuan slid 0.5% on the onshore market to the lowest level in more than 28 months. The offshore yuan fell 0.4%.
The rapid declines prompted the People’s Bank of China to impose a risk reserve requirement of 20% on banks’ foreign exchange forward sales to clients, starting Wednesday. The move would make it more costly for traders to buy foreign currencies via derivatives, which might slow the pace of the yuan’s declines.
Elsewhere in the region, the Japanese yen dropped 0.6% against the dollar to 144. Last Thursday, the Japanese central bank intervened in the currency market for the first time since 1998 to prop up the yen. The yen rebounded slightly following the intervention, but soon resumed the slide.
The Korean won also plunged 1.6% on Monday versus the greenback, falling below the 1,420 level for the first time since 2009.
Stock markets in the region were in a turmoil on Monday, after US stocks sold off on Friday as recession fears grow.
South Korea’s Kospi declined 2.7%, Japan’s Nikkei 225
(N225) dropped 2.4%, and Australia’s S&P/ASX 200 was down 1.4%. China’s Shanghai Composite Index dipped 0.1%.
“Risk sentiments have been dealt a major blow by the Fed’s latest policy action and guidance,” said DBS analysts in a research report on Monday.
The Federal Reserve on Wednesday approved a third consecutive 75-basis-point hike in an aggressive move to tackle white-hot inflation that has been plaguing the US economy.
Even without the Fed action, Europe is looking at a recession due to the war in Ukraine, and China is looking at “a substantially weak growth dynamic” because of a variety of domestic factors, the DBS analysts said.
“Add on top of that a sharp decline in US dollar liquidity and sharply higher US interest rates, the world economic outlook looks particularly precarious,” they added.
Rupee Hits All-Time Low As Major Currencies Crack Against Dollar
The rupee hit a new all-time low against the dollar, marking the third straight session of record low levels breached, plunging well past 81.50 per dollar on Monday as the greenback rose sharply to multi-year highs against most major currencies on fears of a global recession from the rising borrowing rates worldwide.
Bloomberg quoted the rupee last changing hands at 81.5038 per dollar, after opening at its weakest level of 81.5225 and hitting a record low of 81.5587, compared to its Friday’s close of 80.9900.
PTI reported that the domestic currency fell 38 paise to an all-time low of 81.47 against the US dollar in early trade.
“The panic is created by the dollar index which witnesses strong buying as a strong hedge against interest rate hikes and inflation cycle. The rupee downtrend will continue as long as positive triggers are not witnessed from the inflation forefront,” Jateen Trivedi, Vice President – Research Analyst at LKP Securities, told ANI.
“The next trigger for the rupee next week is the RBI policy which shall provide some respite to the rupee fall. The rupee range can be seen between 80.50-81.55 before RBI policy,” he added.
Later in the week, the Reserve Bank of India is set to raise rates too, but by how much has split policy watchers widely.
Due to the RBI’s market intervention to protect the weakening rupee and for the country’s trade settlement, India’s foreign exchange reserves have been steadily declining for the past few months. Another potential explanation for the rupee’s decline is this depletion.
The Indian rupee is likely to remain weaker as investors expect that the US Fed will continue to hike interest rates aggressively to cool inflation, Sriram Iyer, Senior Research Analyst at Reliance Securities, told PTI.
“Focus now shifts to RBI’s meeting this week, with its decision due on Friday. We expect RBI to hike rates by 50 bps to cool stubbornly high inflation and prevent the currency from weakening further,” Mr Iyer added.
Interest rate hikes in the United States and an aggressive policy stance by the Federal Reserve forced a dozen other nations to do so last week, underscoring global economic slowdown risks, which has led to the onslaught of relentless sell-off in global financial markets and a dollar rally.
The dollar rally is also a reflection of investors increasing flight-to-safety bets as Asian markets risk experiencing crisis-level stress again, as two of the most significant currencies in the region have collapsed under the assault of unrelenting dollar strength – the yen and the yuan.
Due to the widening gap between the ultra-hawkish Federal Reserve and the dovish policymakers in China and Japan, the yuan and the yen are falling.
The drop in the yuan (renminbi) and the yen is making matters worse for everyone and endangering the region’s reputation as a top destination for risk investors. At the same time, other Asian countries heavily rely on their foreign exchange reserves to offset the effects of the dollar.
“The renminbi and yen are big anchors, and their weakness risks destabilizing currencies to trade and investments in Asia,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, told Bloomberg.
“We’re already heading toward global financial crisis levels of stress in some aspects; then the next step would be the Asian financial crisis if losses deepen,” he added.
If the decline in the currencies of the two largest economies in the region causes foreign investors to withdraw money from Asia, a full-fledged crisis could develop.
The declines could spark a vicious cycle of competitive devaluations, a drop in demand, and a loss of consumer confidence.
“Currency risk is a bigger threat for Asian nations than interest rates,” Taimur Baig, chief economist at DBS Group in Singapore, told Bloomberg. “At the end of the day, all of Asia are exporters, and we could see a reprise of 1997 or 1998 without the massive collateral damage.”
Not just Asian currencies, the dollar’s ascent has pushed the British pound to a new lifetime low, and analysts are now calling for a sterling parity with the dollar.
The pound led declines among major currencies Monday, slumping to a record low, and the euro wobbled to a two-decade low at $0.9660 as war risks escalated in Ukraine before steadying at $0.9696.
Other currencies, too, were nursing losses, as reflected by a dollar gauge hitting a record high, with the Aussie currency touching $0.6510, its lowest since mid-2020.
“It’s a king US dollar — we’ve been seeing currencies across Asia come under pressure,” Sian Fenner, senior Asia economist for Oxford Economics, said on Bloomberg TV. “It’s adding to inflationary pressures and more central banks raising rates more than we have historically seen.”