The issue of the status of the US Dollar is something I get asked about a lot. In terms of the mainstream media it is always about to be demoted and relegated and yet in the next round we get the same followed by rinse and repeat. One of my usual responses to this has been raised by this from the Financial Times.
Trump administration officials are discussing ways to encourage other countries to adopt the dollar as their primary currency to counter a China-led charge to erode the greenback’s global dominance.
Actually at this moment I think that is country not countries as Argentina comes to mind. Back on November 20th 2023 I looked at this.
The easy hit is going from an interest-rate of 133% to 5.25%. Those upset about economic policy being set by another country and indeed essentially the US Federal Reserve and Jerome Powell seem to be ignoring what a mess Argentina has made of monetary sovereignty. Many would welcome a change from an inflation rate of 142% that is feared to rise to 200% for one around 3%.
The numbers have changed with the US interest-rate now being a bit below 4% and inflation in Argentina looks set to rise back to 30% after the Peso decline this year.
One economist has always been keen on this.
“[The political personality] made clear what was already clear to me: there was a group high up within the administration that was interested in bolstering the international role of the dollar,” Hanke said, adding that the interest in dollarisation was “in the same space” as the administration’s push for broader use of dollar-backed stablecoins. ( Financial Times)
Let us park the stablecoins issue for now. As you can see Professor Hanke is a fan of dollarisation and for him it is not far off a one-size fix all.
Hanke told officials he believed the Latin American country would be one of the obvious candidates for the policy, along with Lebanon, Pakistan, Ghana, Turkey, Egypt, Venezuela and Zimbabwe. ( Financial Times)
One-size fix alls can end up with trouble.
Argentina maintained a “currency board” peg to the dollar from 1991 to 2002 but it collapsed after the country’s catastrophic 2001 default. ( FT)
For me the time was when Milei was initially elected but whilst we have looked at the gains there is also this issue. Back to November 20th 2023.
If you think that is bad then the real exchange rate or what is called the Blue Dolar was at 950.
If we round the numbers off then circa 1000 has been replaced by circa 1500 now which reflects real changes in the economy. So there have been real economic changes requiring a lower exchange rate for the Peso. Maybe some will have been stopped by dollarisation but not all. Thus there would be an initial economic crunch.
Private-sector dollarisation
What gets forgotten is that when a country is in an economic or war crisis the ordinary person sings along with Aloe Blacc.
I need a dollar, dollar, a dollar is what I need(Hey, hey)Well, I need a dollar, dollar a dollar is what I need(Hey, hey)And I said I need dollar, dollar, a dollar is what I needAnd if I share with you my story, would you share your dollar with me?
I remember reading estimates of Argentines holding some US $200 billion or so of US Dollars. Well done to them but there are consequences as their sales add to the decline of the Peso. Also we see that they have adjusted but the state has not and to the extent that the state intervenes it has done exactly the opposite.
Supply of US Dollars
If we switch to this the situation is more complex than may initially appear. Over the year to September the US M2 money supply measure rose by just under a trillion to US $22.2 trillion.So the number grows. Next up is that one way of trimming the growth is about to stop.
The Committee decided to conclude the reduction of its aggregate securities holdings on December 1.
That means that there will be an extra US $40 billion per month from December onwards. It may take a while to be picked up in practice as this involves a switch from mortgage bonds to US treasuries
Next up is an issue frequently ignored which is that the majority of broad money expansion comes from the banks. Life has just been made easier for them in a money way with the interest-rate cut but more significantly via the smoothing of money markets with the end of QT.
The Dollar exchange-rate
If we look at the Dollar Index we can start with two perspectives. Firstly at 99.9 it is pretty much right back where it started from. Next a just under 4% fall over the past year gives economics 101 a tick as we look at the money supply increase above. But then economics 101 needs a hair shirt because expectations and implementation of easier policy last month has seen the Dollar index rise by 2% over the last month.
US Economy
This appears to be on rather a tear according to the Atlanta Federal Reserve.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 3.9 percent on October 27, unchanged from October 16 after rounding.
We are short of official data due to the government shut down.But as far as we can tell the economy will be supporting the US Dollar.
Gold
Here is a clear area where we have seen a type of de-dollarisation. The surge in the price of Gold to above US $4300. Even the recent weaker phase has left it around US $4000 this morning. That is up some 46% on this time last year so the US Dollar buys much less Gold than it did or if you prefer it has seen a pretty large devaluation.
Things get a lot more awkward though when we note that Gold is priced in US Dollars. Of course it also trades in other currencies but the US Dollar is primus inter pares.
Bitcoin
The same principle holds here because even with a 3% fall today at around US $107.000 it is some 56% higher than a year ago. There has been a substantial devaluation here.
Stablecoins backed by the US Dollar
This is a really curious development as isn’t the Crypto world supposed to be an escape from the US Dollar? So why peg yourself to it? Yes the guarantee hopefully ends some of the risks of there being no backing for a stablecoin. But you are trapped in a vehicle you are trying to avoid by pegging to the US Dollar.
As I pointed out on October 2nd there is so much inconsistency here.
Donald Trump Jr said the explosion of stablecoins this year would help reinforce the US dollar’s dominance as the global reserve currency despite shifting geopolitics.
Trump Jr, the eldest son of the US president and a leading proponent of America’s embrace of crypto assets, said the surge in demand for stablecoins backed by the dollar was providing a ballast to sales of US debt. ( Financial Times)
Comment
The reality is that whilst there are many challenges the US Dollar remains the leader of the pack. In any crisis people look to get US Dollars. Is it under challenge? Yes. But the challengers like the claims for the Euro and the Yuan have their own problems.
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