St. Louis Fed President James Bullard says the US economy is proving more resilient than the central bank thought.
Bullard says strong labor market data has caused investors to prepare for further tightening.
Still, Bullard forecasts that the US has “a good shot at beating inflation” this year.
St. Louis Federal Reserve President James Bullard says the US economy is more resilient than the central bank once thought, repeating his call for more aggressive interest rate hikes to combat persistently high inflation.
The labor market has remained surprisingly resilient in the face of rising borrowing costs, Bullard says, with the unemployment rate tumbling to a 50-year-low as job gains crushed estimates last month.
Bullard says markets are reacting to this “blowout” data, which indicates that US economic growth has not slowed enough to pull back on rate hikes.
Equity markets saw a steep sell-off on Tuesday, with the Dow Jones Industrial Average erasing nearly all of its 2023 gains. US treasury yields rose on signs that the economy remains strong despite nearly a year of monetary policy tightening, setting the stage for higher interest rates over the course of this year.
Russia and Iran plan a gold-backed stablecoin, while Brazil and Argentina seek a shared currency. Here are 5 rising threats to the dollar’s dominance of global trade.
The dollar’s supremacy in global trade faces fresh challenges as several countries float plans to use local currencies in commerce.
Russia and Iran are working to create a gold-backed stablecoin, while China is increasingly using the yuan in its oil trades.
Here are 5 rising challenges to the greenback’s dominance of international trade and investment flows.
The dollar’s dominance of global trade and investment flows is facing a slew of new threats as many countries push plans to boost the use of alternative currencies.
Nations from China and Russia to India and Brazil are pushing for settling more trade in non-dollar units – with plans ranging from the use of local currencies to a gold-backed stablecoin and a new BRICS reserve currency.
For decades, the greenback has reigned supreme as the world’s reserve currency and is widely used in crossborder trade, especially for commodities such as oil. Thanks to its relative price stability, investors see it as a safe-haven asset in times of heightened economic and geopolitical uncertainty.
The dollar was further bolstered last year by a surge in US interest rates that made it attractive to foreign investors seeking higher yields. It surged 17% during the first nine months of 2022, but has since lost some of its shine on the prospect that the Federal Reserve may soon end its rate hikes as inflation cools rapidly.
Against this backdrop come the latest threats to the greenback’s reign — here are five currency projects from across the world that are ultimately aimed at undermining the dollar’s supremacy.
Brazil and Argentina plan a common currency
Brazil and Argentina recently announced they are gearing up to launch a joint currency, named the “sur” (south), that could eventually become a euro-like project embraced by all of South America.
A common currency could help boost South American trade, the countries’ leaders said in a joint statement, because it evades conversion costs and exchange rate uncertainty. That could erode the dollar’s dominance in the region, given the greenback accounted for as much as 96% of the trade between North and South Americas from 1999 to 2019, according to the Federal Reserve.
Russia and Iran eye a gold-backed stablecoin
Russia and Iran are working together on a cryptocurrency backed by gold — a ‘stablecoin’ that could replace the dollar for payments in international trade.
The two countries, both of which have been hit by Western sanctions, want to issue a “token of the Persian region” for use in crossborder transactions, with a plan to launch it in a special economic enclave in Astrakhan in southern Russia, which already handles Iranian shipments.
But the project can move forward only once Russia’s market for digital assets is fully regulated, according to a Moscow lawmaker.
Russia and Iran have stepped up their push to “de-dollarize” in recent months, according to think tank the Jamestown Foundation. They aim to increase their volume of trade to $10 billion per year via moves such as developing an alternative international payments system to SWIFT, which they are banned from.
UAE, India look at using rupees in non-oil trade
Meanwhile, the United Arab Emirates and India have floated the idea of conducting non-oil trade in rupees.
The move would build on a free trade agreement signed last year, which aims to boost trade excluding oil between the two countries to $100 billion by 2027.
China has also pondered on the idea of settling non-oil trade in local currencies that exclude the greenback, according to minister of state for foreign trade of the UAE Thani bin Ahmed Al Zeyoudi.
China pushes for the yuan to replace the dollar in oil trades
The move looks to chip away at the petrodollar regime in place since the 1970s, where global oil transactions are largely settled in dollars.
Toward the end of last year, Beijing began buying Moscow’s crude at steep discounts, completing those purchases in yuan rather than dollars, giving rise to the so-called petroyuan.
With a stronger greenback, oil contracts become more expensive because the deals are largely priced in the US currency, and this also explains China’s shift away from the dollar.
Kpler analyst Viktor Katona said Russia has effectively become “an Asian nation that in my opinion has introduced the yuan into large-scale oil trade.”
Russia, China propose a new reserve currency
Last year, Russia and China kickstarted talks to develop a new reserve currency with other BRICS countries in a challenge to the dollar’s dominance.
The new reserve unit would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
The dollar’s reign as the chief reserve tender is already on the wane as central bankers diversify their holdings into currencies like the Chinese yuan, the Swedish krona and the South Korean won, according to the International Monetary Fund.
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“You have a very strong labor market combined with more momentum coming out of the second half of 2022 than we previously thought,” Bullard told CNBC’s ‘Squawk Box’ on Wednesday. “That adds up to markets wanting to price in a tougher road ahead for inflation and disinflation in 2023.”
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Bullard added: “I think that’s basically the repricing that’s going on right here.”
Traders seemed optimistic that high inflation and more rate hike were in the rearview as tech stocks rallied earlier this year. The tech-heavy Nasdaq is still up 11% year-to-date after yesterday’s nosedive.
Still, the central bank official says he thinks the US still has “a good shot at beating inflation in 2023” without creating a recession. However, Bullard advocated for stepping up the pace of rate hikes so this can happen, bringing the federal funds rate to 5.375% in order to bring inflation closer to the 2% target.
“If inflation continues to come down, I think we’ll be fine,” Bullard said. “Our risk now is inflation doesn’t come down and reaccelerates, and then what do you do?”
Bullard added: “We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s … and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”
