Aura Global Insights – Issue No. 26
WEAPONISING THE US DOLLAR
Whilst the US economy continues to show resilience, a few cracks are appearing in the façade with both manufacturing activity and consumer sentiment having declined from multi-year highs.
As highlighted in previous weeks, the US Federal Reserve (Fed) remains caught in the crossfire of the escalating US-China trade tensions. Fed Chair Jerome Powell acknowledged the rise in geopolitical tensions at his recent speech at Jackson Hole, reiterating the central bank’s commitment to “act as appropriate to sustain the expansion.” While the Fed does not want to enable the trade conflicts, it could be forced to ease further to offset the negative impact on the economy.
Whatever the source of business risk, cutting US interest rates enough to steepen the yield curve looks increasingly likely. The effect on borrowing conditions might not move much but the effect on the US dollar could be significant. It is an epic historical anomaly that almost all of the world’s major countries’ sovereign debt trades with a yield below the US overnight risk-free rate.
President Trump is a policy activist and is always keen to take the initiative. He has used most of the available policy levers at his disposal. The conundrum is that Trump can’t raise tariffs more without the likelihood of driving the economy into recession. The policy prescription and lever left is to potentially weaponise the US dollar.
Bottom Line: US Policymakers are approaching a critical juncture with respect to preserving its global economic and geopolitical position. The one thing no one is expecting at this stage is a trade deal and therefore this leaves the real prospect of weaponising the US dollar. The downside risk is that pulling the nuclear trigger may set in motion an ugly currency war and a race to the bottom. For Trump, he may think this is “the only way to save the world” – but then again, he is no Flash Gordon.⚡
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