U.S. retreat from trade deals poses new threat to the dollar
The Wall Street Journal
Sunday, May 13, 2018
Trade friction is emerging as the latest threat to the U.S. dollar's position at the heart of the global financial system.
For decades, central banks have held the bulk of their foreign-exchange reserves in the dollar, reflecting the dominant role the U.S. and its currency have played in global trade. As the U.S. pulls back from partnerships while countries like Mexico and Japan strike their own trade deals, the dollar's dominance could be undermined, investors and analysts said. That dominance has been referred to as an "exorbitant privilege," allowing the U.S. to borrow cheaply and run persistent deficits.
Though a less U.S.-centric trade system would take years to fully evolve, it would have significant implications for global central bankers charged with allocating some $11 trillion in reserves. Many are now ramping up investment in such currencies as the euro and Chinese yuan, reflecting the effects of such moves as the U.S. retreat from the North American Free Trade Agreement and Trans-Pacific Partnership.
While the U.S. and Mexico remain in negotiations over Nafta, which could come to a head in the coming days as House Speaker Paul Ryan has set a Thursday deadline to receive paperwork, Mexico has struck major trade deals in recent months with the European Union and the group of Pacific Rim nations that make up the TPP.
Alejandro Daz de Len, governor of Mexico's central bank, said that while the U.S. remains Mexico's most important trade partner, he expects the euro to play a bigger role in the country's foreign-exchange holdings in coming years as the balance of the nation's bilateral trade shifts in that direction. ...
Jens Nordvig, chief executive of analytics firm Exante Data, estimates global central banks could shift $200 billion to $300 billion in reserves into the yuan, euro and a handful of other foreign currencies this year as a result of trade changes. His estimate is based on central banks' increased buying of Chinese bonds in the first few months this year.
While he cautions that central bankers tend to adjust reserves slowly, "the flows that potentially come out of this are really big."
Few are calling for an immediate end to the dollar's reign as the world's primary reserve currency.
Central banks held about 63% of their reserves in U.S. dollars at the end of last year, the lowest level in four years, according to data from the International Monetary Fund. Meanwhile, allocations to the euro rose to 20% and reserves held in the Japanese yen rose to 4.9%.
"What's sure is that over the long term, if trade relations change, it will have an implication on the currency makeup of the reserves," said Christian Deseglise, global head of central banks for HSBC . "As trade becomes more denominated in euros [and yuan], they'll need to have currencies to match." ...
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