[Financial Review] Global liquidity depletion crisis eased   dollar status is facing test

Jun 24 - 2020


  Former US Treasury Secretary Paulson (Henry Paulson) published a signed article on the official website of the Paulson Foundation on Monday (22nd), stating that the status of the US dollar as the world’s major reserve currency is being tested, and the United States’ ability to respond to the new crown epidemic Factors such as the effectiveness of its economic policies governing national debt and fiscal deficits will determine whether the US dollar will pass the test.

  The outbreak of the new coronavirus pneumonia caused huge shocks in the financial market. US stocks fell between bears in a record speed in March 2020, causing liquidity to dry up, the credit market risk premium soared, and the global demand for dollars greatly exceeded the supply. . In order to ease the liquidity difficulties of the US dollar, the Federal Reserve (Fed) sharply cut interest rates, and through open market operations and the establishment of new policy tools to help global central banks and financial institutions through the difficulties.

  As the worldwide liquidity crisis eases, Fed data shows that the monetary authorities of various economies use the Fed’s dollar limit to hit a new low in nearly three months, which is the main reason for the unexpected decline in the Fed’s $7 trillion balance sheet. As of June 17, the Fed’s foreign exchange swaps with central banks in other economies decreased by 92 billion yuan (US$‧ the same below) to 3,525 yuan, compared with 444.5 billion yuan a week ago.

  In addition to the reduction in the use of swap lines, the Fed’s demand for emergency tools has been declining. "Reuters" reported that since May, the balance of credit provided to primary market traders, commercial paper issuers, money market mutual funds, and direct loans to banks to meet reserve requirements have either stabilized or declined sharply .

  Perhaps the most obvious sign is that the demand for repurchase agreements has plummeted. On March 18, the Fed's repo balance reached its highest record, close to 442 billion yuan. On June 17, after a week-long decline of 88 billion yuan, this figure fell to only 79 billion yuan. This is the lowest level since the Fed was first forced to intervene in the repo market in mid-September 2019.

  However, some analysts believe that the main issue of investors for the US dollar is that as the market's concerns about the potential second wave of the epidemic increase, the demand for the US dollar as an emergency currency may be weakening.

  Since World War II, the status of the US dollar is unshakable. The United States uses US dollar assets to pay lower interest rates and reduce exchange rate risk. Therefore, the federal government can withstand larger deficits and give financial markets more liquidity. The real economy directly benefits from Convenient financing conditions.

  But Paulson believes that the dollar’s ​​ability to maintain its position for a long time is a historical anomaly, especially considering the rise of emerging markets and the relative decline of the US economy.

  As of June 22, the national debt of the United States has reached 26.24 trillion yuan, that is, since 2020, the new national debt has exceeded 3 trillion yuan. This has to cause people to worry that the scale of the rapid growth of US Treasury bonds will have an impact on the fiscal budget, thereby exacerbating the financial crisis.

  Paulson believes that at present, the renminbi is the most likely currency to replace the US dollar. The renminbi has become a reserve currency along with the yen, the euro, and the pound. China’s economic size, future growth prospects, integration with the global economy, and accelerated internationalization of the renminbi all help the renminbi play a greater role.

  On June 19 local time, the Central Bank of Turkey officially announced that from the 18th of this month, all companies that pay for imports of goods from China through the bank will be settled in RMB. In addition, a representative of Singapore also said in a speech at the Lujiazui Forum on June 18 that it will continue to deepen cross-border RMB cooperation projects between the two countries.

  CICC analyzed that the growth advantage of the US over other economies is diminishing. Especially since the global epidemic hit the recession in 2020, the previous "outstanding" of the US economy is no longer there. In the second half of the year, the global economy recovered and risk appetite was restored. As a typical counter-cyclical asset, the US dollar is under selling pressure in the context of global economic recovery and risk appetite restoration.

  In the final analysis, the value of a country's currency to its holders reflects the economic and political fundamentals of the country. In the years after the epidemic crisis, what kind of transcript the United States will hand over will be an important test.