US Witnesses The De-dollarization of The Global Economy (#GotBitcoin)
Russia Demotes Dollar’s Role at Home, Taking a Swipe at U.S.. US Witnesses The De-dollarization of The Global Economy (#GotBitcoin)
Russia is trying to wean itself off the greenback as its economy buckles under U.S. sanctions and the country prepares for stricter penalties expected later this month.
Russia’s central bank has ramped up its gold reserves this year and sold U.S. Treasurys. Now plans are under way to execute more trade deals in rubles and other currencies, and tax incentives are being considered for exporters that shun the dollar.
The so-called de-dollarization process, backed by President Vladimir Putin and Russia’s central bank, should help soften the blow if new Western sanctions target the financial system.
For the Kremlin, the effort is a not-so-subtle retaliation against Washington’s injunctions, and is part of its broader efforts to inoculate the economy by spurring local production and investment as well as strengthening ties to China. Mr. Putin last month called the U.S. sanctions policies a “colossal strategic mistake” undermining confidence in the dollar as a universal currency, the official Russian news agency, TASS, reported. “They are sawing the branch on which they sit.”
Officials say Moscow isn’t planning to ban the use of dollars or dollar-denominated debt. But even diversifying away from the greenback is a tall order, analysts say.
The dollar is involved in nine out of every 10 transactions in the daily $5 trillion foreign-exchange market and the majority of global debt is in dollars. Wild swings in the ruble in recent years have undermined confidence in the currency, while the Russian economy is heavily reliant on dollar-priced commodities such as oil, gas and steel.
Still, Russia is joining a growing number of countries pushing back against the hegemony of the American currency.
This March, China launched a yuan-denominated oil-futures contract that has rapidly gained popularity among oil traders. European Union officials have sought to bolster the role of the euro and openly discussed setting up a new payment system independent of the U.S. Iran, which faces even broader U.S. sanctions than Russia’s, has also moved to limit the role of the dollar, as have Venezuela and Pakistan.
“It’s not clear how much of this [de-dollarization] trend is poker games, but the unpredictability of current U.S. foreign policy means that more countries need to question things that have never been questioned before,” said Thomas Flury, head of foreign-exchange strategies at UBS Global Wealth Management.
In Russia, the de-dollarization push has been driven by fears that future U.S. sanctions could cut off local banks and exporters from the U.S. financial system. A spate of Western sanctions since 2014, following Russia’s annexation of Crimea from Ukraine, has already hit the economy, reduced investment and crippled aluminum giant United Co. Rusal PLC.
Russia will “stop using the U.S. dollar and will use our national currency [and] other currencies, including the European currency,” Russia’s Finance Minister Anton Siluanov said on state television in August. “So, as a matter of fact, these restrictions will backfire at the Americans.”
Additional U.S. sanctions could be imposed as soon as this month as punishment for Moscow’s alleged nerve-agent attack in March against a former Russian spy in the U.K. Congress is also considering further penalties on Russia’s financial system and its banks.
Moscow is expected to publish its de-dollarization plan by the end of the year. Officials say the plan, originally conceived by the head of the sanctioned state bank VTB, Andrei Kostin, will include tax credits and other incentives for firms using the ruble such as expedited value-added tax returns.
Already, the dollar’s role in the Russian economy has been shrinking. The share of foreign-currency deposits held by individuals and firms in Russian banks has fallen to 26% this September, from a 2016 peak of 37%, according to Wall Street Journal calculations based on central-bank data. And the share of dollar-priced export revenues fell to 68% in the second quarter of this year, from over 80% in 2013, central-bank data shows.
Russia’s fast-growing trade with China is a case in point. The share of trade priced in rubles and yuan has nearly quadrupled in four years to around 19% of their bilateral trade and will continue to expand, according to Dmitry Dolgin, Moscow-based economist at ING Bank.
Russian officials have also proposed using national currencies for trading oil with countries such as Iran and Turkey, though little has come of these efforts so far.
Some Russian companies are also dipping into the de-dollarization fray.
Alrosa Group, the world’s largest diamond producer, has recently piloted ruble deals with Indian and Chinese customers. To avoid exchange-rate volatility, it executed those transactions within a few hours, the company said.
“We are considering opportunities to expand this pilot to other countries or currencies,” said Alrosa spokeswoman, Evgeniya Kozenko.
Still, ditching the dollar is easier said than done.
Though Russia’s non-dollar trade is poised to grow, businesses will be reluctant to incur greater costs than competitors who are using the dollar, according to Jason Bush, senior analyst at Eurasia consultancy.
Analysts also say that the push to de-dollarize is partly political rhetoric aimed at responding to the deepening chill in relations with the West. The structure of Russia’s economy, where dollar-priced oil and gas sales bring in around 40% of budget revenues, will limit such initiatives.
“De-dollarization is a hot topic and the banks will help to facilitate this,” said Richard Segal, emerging-market analyst at Manulife Asset Management. “But because the economy is so commodity-based, I doubt there will be a major long-term push.”
Digital Yuan Will Combat US ‘Dollarization’ Says Former PBoC Governor
“We need to prevent dollarization — this is one of the major designing points of the Chinese DCEP,” said Zhou Xiaochuan.
China’s digital currency approach will favor its domestic retail system and prevent the dollarization of the economy according to one former senior official.
Zhou Xiaochuan, the president of the Chinese Finance Association and former governor of the People’s Bank of China (PBoC), told attendees at a Eurasia Forum conference on Oct. 27 that the central bank’s focus in creating a digital currency differed considerably from that of the countries in the Group of Seven — Canada, France, Germany, Italy, Japan, the U.K., and the U.S.
According to Xiaochuan, the G7 was mainly concerned with “the challenges raised by Libra, Bitcoin, and similar digital encrypted currencies,” while China’s central bank was focusing on using its digital currency for retail payments domestically and preventing the U.S. dollar from becoming a more common medium of exchange in the country.
“In China, we’ve [been working] very hard to push the DCEP — that’s the digital currency — and the electronic payment,” said Xiaochuan. ”However, the focus and the major point of our concept and the content are different from the G7 principle.”
“We [need] to prevent dollarization. This is one of the major designing points of the Chinese DCEP.”
Countries representing the world’s largest economies have openly expressed their concerns regarding the launch of Facebook’s Libra project, calling it a threat to the global financial system. In a draft of a statement released on Oct. 12, the G7 members said they would initially oppose any global stablecoin project without appropriate regulatory oversight.
Officials at Canada’s central bank have reportedly been preparing their own CBDC if Libra were to get blocked by regulators. Today, Bank of Canada Governor Tiff Macklem stated that central banks needed a “globally coordinated” strategy in developing a digital currency to prevent misuses by criminals.
China’s central bank recently launched a pilot program to test its digital yuan by giving away $1.5 million to 47,500 people in the city of Shenzhen. Though the CBDC has not been officially released by The People’s Bank of China, it recently drafted a law providing regulatory framework and legitimacy to the digital currency. The law is open for public consultation until Nov. 23.
China Floats Idea Of ‘Asian Yuan’ To Reduce Reliance On US Dollar
The proposed distributed ledger technology-backed “Asian yuan” token would supposedly help reduce Asia’s dependence on the U.S. dollar for international business.
Researchers from a Chinese state-run think tank have floated the idea of an Asia-wide digital currency with the aim of reducing its reliance on a United States dollar-based economy.
The views of researchers Liu Dongmin, Song Shuang and Zhou Xuezhi from a unit of the Chinese Academy of Social Sciences (CASS) were published in an issue of the World Affairs journal posted online in late September, who said the establishment of an Asian yuan token would lower Asia’s reliance on the USD.
Much like similar existing and trialed central bank digital currencies (CBDCs), the researchers said distributed ledger technology (DLT) would form the backing of the Asian token, which would be pegged to a bundle of 13 currencies.
The currencies would include those of all 10 of the member nations in the Association of Southeast Asian Nations (ASEAN) along with China’s yuan, Japan’s yen and South Korea’s won, according to the researchers.
“More than 20 years of deepened economic integration in East Asia has laid a good foundation for regional currency cooperation. The conditions for setting up the Asian yuan have gradually formed,” the researchers wrote in the journal seen by the South China Morning Post.
The journal is affiliated with China’s Foreign Affairs department, with the researchers hailing from the “Institute of World Economics and Politics” one of many research units under CASS, a think tank with various ties to the country’s ruling party.
The U.S dollar and, more recently, cryptocurrencies have become a popular method for those in South East Asia to conduct business, send remittances and hedge against the inflation of their respective local currencies.
The research came a few weeks before a milestone in China’s CBDC pilot, the Bank of China on Oct. 10 said its e-CNY had transacted around $14 billion in value, or 100 billion yuan, with around 5.6 million merchant stores already supporting the digital yuan.
The country’s central bank is also partaking in Project Inthanon-LionRock, a DLT-backed cross-border payment CBDC trial also involving the Thai, Hong Kong and United Arab Emirates central banks.
In September the trial saw the “successful” transaction of over $22 million worth of value in a month on its “Multiple CBDC Bridge” platform overseen by the Bank for International Settlements (BIS).
Lula Backs BRICS Currency To Replace Dollar In Foreign Trade
* He Spoke After Visiting Headquarters Of BRICS Bank In Shanghai
* Brazil’s President Has A Bilateral With Xi Jinping On Friday
Brazil’s Luiz Inacio Lula da Silva called on BRICS nations to come up with an alternative to replace the dollar in foreign trade, supporting China’s crusade against US global dominance just as he prepares to meet with President Xi Jinping in Beijing.
Lula’s remarks were made on Thursday during a visit to the Shanghai-based New Development Bank, an institution created by BRICS countries, which, along with Brazil and China, include Russia, India and South Africa. Former Brazil President Dilma Rousseff is the bank’s new chief executive.
“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” he said. “Who decided that the dollar was the (trade) currency after the end of gold parity?”
Beijing has ramped up efforts to boost the use of its own currency in foreign trade. Last month, Brazil and China took steps to make it easier to settle their foreign trade operations in yuan or reais, with the stated goal of reducing costs by eliminating a third currency from the transactions.
Brazil’s Finance Minister Fernando Haddad, who’s accompanying Lula in his trip to China, said local currencies are already used in bilateral trade through instruments such as credit receipts.
The goal, he added, is to expand mechanisms that allow trade operations to be settled without the intermediation of a third currency.
“The advantage is to avoid the straitjacket imposed by necessarily having trade operations settled in a currency of a country not involved in the transaction,” he told reporters in Shanghai.
What De-Dollarization? The Dollar Rules The World
Dollar hegemony is beneficial for the US, its government and most of its citizens — and is likely to last for the foreseeable future.
By one estimate, the dollar is a part of 88% of all international transactions. Some people fear this dominance cannot last, while others question whether it should: Doesn’t a stronger dollar hurt US exports, and thus US workers?
The good news, for Americans at least, is that dollar hegemony is beneficial for the US, its government and most of its citizens. Furthermore, it is likely to last for the foreseeable future.
The issue has become more topical lately. Because of sanctions, Russia is cut off from many dollar-based networks. Other nations, such as Brazil, India and Saudi Arabia, have made at least cosmetic moves toward “de-dollarization,” hoping to rely less on the dollar for their international exchanges.
Think of “a sound and focal dollar” as a good or service that the US produces, just as China manufactures phones or Japan makes cars.
When Americans trade dollars for foreign goods and services, that measures as a US trade deficit, but it can also be seen as America exporting dollars and “dollar services.”
The US brands and markets its dollar, just as Zara or the Gap brands and markets clothing.
So the much-vaunted US trade deficit can be reconceptualized as a form of barter: One service (dollar stability) is being exchanged for another good or service (e.g., whatever America buys from China). In essence, branding and selling dollars so effectively — also known as “buying things” — enables US consumers to have a higher standard of living.
To be clear, sometimes selling a particular good or service can be a negative, or at least a mixed blessing. Venezuela’s economy is very dependent on oil revenue, for example, and with unstable oil prices, its revenues are unreliable. Demand for US dollars is not unstable in the same manner.
In fact, with conflict in Ukraine and increasing Chinese ambitions, the dollar seems to have a secure future as a safe haven currency — maybe too secure, from a broader point of view.
If there is any danger here, it is that the forthcoming debate in Washington over the debt ceiling somehow results in a US default. Even if that were to happen, however, it would not be an argument against dollar hegemony, nor evidence that dollar hegemony must end. It would just be more proof of the stupidity of America’s politics.
To the extent the US dollar is strong, that does make it harder for America to export other goods and services. But there is nothing special or undesirable about this reality.
If South Korea were to export more Samsung phones, for instance, that would boost South Korean wages and the won, and in turn make it harder for Korea to export alternatives such as K-pop.
In any given country, different economic activities have to compete for resources, funding and attention. That’s simply an illustration of the basic economic fact of scarcity.
If US dollars are so much in demand, it is testament to America’s history as a beacon of relative stability — which may be a stronger draw than, say, the quality of US tractors or movies.
How far is the talk of de-dollarization going to proceed? Probably not very. The US has the world’s deepest and most liquid financial markets, and they remain relatively open, in spite of some restrictions on Chinese investment in industries sensitive for national security.
There are strong reasons to have a dominant currency in international markets, just as there are strong reasons for having a dominant currency in domestic transactions within the US. Liquidity for a currency begets further liquidity, whether at home or globally.
With the dollar estimated at 88% of all international transactions, the euro at 31% is only a modest competitor (since a transaction may involve two currencies, the total may exceed 100%).
The euro, unlike the dollar, will never be tied to a single national government, and the European Union does not come close to the military might of the US.
The yuan is estimated at only 7% of that total of international transactions, and China seems unwilling to open up its capital markets, as that could lead to rapid capital outflows and possibly a financial crisis. But without open capital markets, the yuan is not a strong contender for a global reserve currency.
Economics can sometimes be complicated or hard to explain. When it comes the US dollar, it is neither. The dollar will retain its focal role, which is good for the US, and the reasons are simple and intuitive.
Why The Desire To Move Away From The Dollar Is Getting Real
Is de-dollarization different this time?
There’s been a lot of discussion about the possibility of “de-dollarization,” or the idea that the world could move away from using the dollar as the de facto global reserve currency. Some of this desire makes sense.
Not only has the Federal Reserve been hiking rates at the fastest pace in decades, which puts economic pressure on other countries through links to the dollar and US trade, but sanctions imposed on Russia have also made some nations more wary of relying on US financial assets and infrastructure.
And in BRICS countries (Brazil, Russia, India, China and South Africa), there seems to be growing appetite to usurp the dollar’s hegemony.
Of course, we’ve seen this kind of talk before, yet there has been little change to the dollar’s special role. So is it different this time?
On this episode, we speak with Paul McNamara, an investment director at GAM and a veteran of emerging markets, about what’s driving this renewed clamor for de-dollarization.
Circle CEO Warns Of Active And Accelerating De-Dollarization
The United States must capitalize on the “high demand” for digitally native U.S. dollars, particularly from those in emerging economies with weak local banking systems, the Circle CEO says.
The United States must implement stablecoin legislation and digitize the U.S. dollar to mitigate the “very active de-dollarization taking place” around the world right now, says Jeremy Allaire, the CE of stablecoin issuer Circle.
Allaire’s comments at the Consensus 2023 conference on April 26 were made in light of the recent U.S. banking crisis.
The CEO of Circle — the stablecoin issuer behind USD Coin — called on Congress and the Federal Reserve to take action, saying that otherwise, alternative currencies and payment systems would continue to eat into the dollar’s dominance:
“We have a very active de-dollarization taking place. You’re having very significant reactions to the U.S. risks in the U.S. banking system, risks with the U.S. government itself, a geopolitical imposition on many parts of the world [and] the desire for alternative payment systems all around the world.”
“This is happening and it’s accelerating,” he added.
For the USD to remain “competitive” and “safe” in the internet era, Allaire said the U.S. needs to lay out stablecoin legislation imminently, and the Federal Reserve needs to implement the digital dollar into its “core systems” to capitalize on the high demand around the world:
“The demand for digital dollars like USDC is highly global. We see that demand all around the world — we see it in emerging markets, we see it in markets where people want to hold a digital dollar versus their local banking system […] as an efficient medium of exchange for various types of international transactions.”
If the U.S. government doesn’t get its act together, this will be a “giant missed opportunity” for the country, Allaire stressed.
The call for action comes as the Chinese yuan overtook the dollar for cross-border transactions in China for the first time in March, according to Reuters.
Circle has taken some responsibility into its own hands of late, having launched USDC on Cross-Chain Transfer Protocol.
Allaire said the new solution is the “most important new piece of blockchain infrastructure” since the firm began minting and issuing USDC in 2017.
China Takes The Yuan Global In Bid To Repel A Weaponized Dollar
A string of new deals promote the Chinese currency as geopolitical risk spills into international finance.
China is putting the yuan front and center in its fight back against the US’s unique influence over global money.
President Xi Jinping’s government has been busy striking deals over the past year to expand the ways in which the currency is used, with new agreements linked to the renminbi stretching from Russia and Saudi Arabia to Brazil and even France.
While the US remains the world’s clear financial hegemon, these moves are helping China to carve out a bigger place for itself in the international financial system.
They come at a time when geopolitical strains are growing and global commerce is becoming an ever-more-active battleground.
Antagonism has flared between the two economic titans over issues ranging from trade and Taiwan to TikTok and technological know-how. Hard-hitting sanctions on Russia have revealed a new willingness by the US to weaponize the dollar.
Together, that’s done more to promote China’s yuan over the past year than Xi’s government achieved in the preceding decade.
The ramp-up is also a response to China’s shifting position within the global economy as it emerges from the era of Covid-lockdowns with growth running more slowly than it once did and the global push for freer trade in retreat.
That’s spurred leaders in Beijing to up the ante in building the country — and in particular its currency — into an alternative pole for international finance, trade and lending.
The nation is working to demonstrate “that there’s a world outside of the US and the Western world,” said Adrian Zuercher, head of global asset allocation and co-head of global investment management for the Asia-Pacific region at UBS Global Wealth Management’s office in Hong Kong.
“You’re sending a very strong signal to the US by basically saying we don’t need you and we don’t need your US dollar.”
That message is resonating in some parts of the world. Unease with the dominance of the US and the greenback is pushing some countries and companies to diversify away from America and Europe.
The use of the renminbi in contracts for everything from oil to nickel is gathering speed, with the currency’s share of global trade finance tripling since the end of 2019.
That’s still a tiny portion of global transactions, and the currency remains tightly controlled by Chinese authorities. But sanctions that ensnared Moscow following its invasion of Ukraine have added to that pace. The yuan’s usage in Russian export payments surged 32-fold last year alone.
Xi, who is embarking on his second decade in charge of the People’s Republic, has taken steps to promote the country’s reputation abroad, even as he focuses on implementing reforms and bolstering growth at home.
His first foreign excursions after lifting lockdowns were to key energy suppliers Saudi Arabia and Russia.
Trips to Beijing by Brazilian President Luiz Inacio Lula da Silva and France’s Emmanuel Macron were accompanied by a host of new commercial agreements. And China was central to brokering an Iran-Saudi detente.
With the US, though, flashpoints have multiplied — from feuds over spy balloons to semiconductor technology.
The ostracism of Russia in the wake of Vladimir Putin’s war in Ukraine has provided China with an important opening to demonstrate just how the yuan can be used.
It also stoked concern among some nations about being beholden to the dollar and the euro, the two biggest currencies.
Locked out of the central international payments system known as SWIFT, Russia embraced the yuan for trade, private savings and foreign-exchange transactions.
China has developed its own international-payments platform — CIPS — that’s entirely separate from SWIFT, which has been embraced not only by institutions in Russia, but also by banks that operate in places like Brazil.
“China’s willingness to maintain growth while paving new paths lends itself for other nations to have greater confidence to use the yuan,’’ said Victor Gao, a professor at Soochow University and vice president of think tank Center for China and Globalization.
“If the US wants to rock the boat, then China will need to make necessary amendments to meet the challenges.’’
Neither the People’s Bank of China nor the country’s State Administration of Foreign Exchange immediately responded to faxes seeking comment.
The seeds of Russia’s move toward the yuan were planted back in 2014, when the annexation of Crimea prompted the US and its allies to threaten Moscow’s access to the mainstream financial system.
But it was the full-blown invasion of Ukraine last year that fast-tracked China’s acceptance.
Yuan savings accounted for 11% of Russia’s total deposits as of January, compared with practically none before the war, and the yuan has replaced the dollar and euro as the most traded currency from St. Petersburg to Vladivostok.
Russia and others have also begun to use the yuan in transactions that don’t even involve China. Bangladesh, for example, agreed with Russia last month to settle a $300 million payment related to the building of a nuclear plant near Dhaka in renminbi, according to officials familiar with the matter.
As oil income helps Russia’s public finances to stabilize, the nation may even be looking to buy yuan in an effort to rebuild foreign reserves.
But there are limits to the experiment. The Kremlin has been left with very few choices, and China’s financial offerings still struggle to compete.
Without deep capital markets or open capital accounts, it can be difficult to move money in and out of the country — a complaint longtime investor Mark Mobius voiced earlier this year.
The lack of deep, free markets is a hindrance if China really wanted to take on the dollar or euro as the global currency of choice.
A fully international yuan “can’t happen unless China allows greater freedom of the currency and inward as well as outward investment,” said Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the term BRICs more than two decades ago to describe what were then the four big emerging-market powerhouses with potential to challenge the existing economic order.
Even with the drumbeat of international deals, the currency is not fully convertible. There are restrictions on its use in areas such as cross-border loans and portfolio investments.
Limitations on the variety of renminbi-based investment products — and the simple inertia that stems from sticking with the prevailing reserve currency — are also major impediments to the yuan becoming broadly accepted as an alternative to the dollar.
“There’s still a long way to go for China to build up its global clout,” said Chen Xingdong, head of global markets research in China at BNP Paribas SA.
In the first few decades of this century, China has taken steps to open up stock and bond markets to encourage inbound investment and loosened some of the strictures around its managed currency.
But Xi’s government has resisted broader measures that would encourage international yuan usage — such as allowing capital to flow freely — to avoid the possibility of sudden outflows that stand to potentially destabilize the economy and threaten the Communist Party’s grip on power.
“There’s so much money queuing up from China to go outside, and there’s probably a limit on how much outside money is queuing to go back in,” said UBS’s Zuercher. “Controlling capital flows is still extremely important.”
The renminbi is only the fifth-most popular currency for cross-border payments. Excluding payments between countries that share the euro, China’s currency accounted for 1.7% of cross-border payments at the end of March, compared to around 50% for the dollar and 22% for Europe’s common currency, according to data from SWIFT.
That, of course, doesn’t include transactions made via China’s CIPS alternative, but that system as a whole is still dwarfed by the mainstream SWIFT platform.
Still, for those in China itself, the usage of the yuan in international transactions has just recently surpassed the dollar, according to research from Bloomberg Intelligence and based on State Administration of Foreign Exchange data.
The local currency’s share of cross-border payments and receipts hit a record high of 48% at the end of March, compared with almost zero back in 2010, while the dollar’s share dropped to 47%.
Even with the the dollar’s dominance relatively entrenched for years to come, some observers speculate that the greenback is headed for a longer-term decline. The events giving life to yuan usage right now may ultimately be a key contributor.
Repercussions from Russia’s war have made other nations anxious about the risk of US-led sanctions, said Esther Law, a senior money manager at Amundi SA.
She expects the yuan to continue rising in popularity amid the fear of US-led sanctions and as a “practical” part of China’s growing role as a lender.
The perk of diversification also applies to China. There’s safety in having standing arrangements with a plethora of trading partners in case simmering tensions with the US turn to a boil.
“Geopolitical tensions just make it that much more important for China to promote the international use of its own currency,” said Stephen Jen, co-founder of Eurizon SLJ Capital. “There is a war of attrition now between the US and China, in investment and finance.”
As Debt-Limit Default Risk Nears Investors Turn To Bitcoin As Safe-Haven
Bitcoin is a more popular safe haven then the US dollar, the yen or the Swiss franc, survey of investors shows.
The risk of a US debt default is greater than it’s ever been, threatening to tip global markets into a brand-new world of pain. For investors, there are few places to hide other than the oldest hedge in the book: gold.
The precious metal is by far the top pick for those seeking protection in case Washington’s game of chicken over the debt ceiling ends in a crash, according to Bloomberg’s latest Markets Live Pulse survey.
More than half of finance professionals said gold is what they would buy if the US government fails to honor its obligations.
Even more striking is the shortage of alternative hedges. The second most popular asset to buy in event of a default, according to the global survey of 637 respondents, was US Treasuries. There’s something of an irony to that given that’s the very thing America would probably be defaulting on.
But it’s worth bearing in mind that even pessimistic analysts see bill holders getting paid— just late — and that in the case of the most fraught debt crisis in previous years, Treasuries rallied even as the US had its top credit rating removed by Standard & Poor’s.
Traditional haven currencies like the Japanese yen and the Swiss franc had some fans, but each were less popular than the US dollar or, perhaps more strikingly Bitcoin, regarded by some investors as a kind of digital gold.
Political and financial bigshots have been lining up to deliver warnings about what might happen if the debt-ceiling impasse isn’t resolved. “The whole world is in trouble,’’ said President Joe Biden. “Potentially catastrophic,’’ said JPMorgan Chase & Co. boss Jamie Dimon. “Very serious repercussions’’ was strong language by the International Monetary Fund’s guarded standards.
A sovereign default by the world’s biggest economy should probably be unthinkable. But it’s definitely thinkable right now.
About 60% of MLIV Pulse respondents said the risks are bigger this time around than in 2011, the worst debt-limit crisis of the past. The cost of insuring against non-payment through one-year credit default swaps has surged well past levels seen in previous episodes, although they still suggest that the actual chance of a default is relatively slim.
“The risk is higher than before, given the polarization of the electorate and the Congress,” said Jason Bloom, head of fixed income, alternatives, and ETF strategies at Invesco. “The way both sides are so dug in, means there is the risk they don’t get their act together in time.”
The gold hedge doesn’t come cheap, as the metal has enjoyed a very good run so far this year. Buoyed first by the growing demand from Chinese luxury buyers, then by a crisis in the banking sector and the threat of US default, it’s currently loitering just shy of its all-time high of $2,075.47 an ounce.
A comfortable majority of investors in the MLIV survey think 10-year Treasuries will rally if the debt ceiling fight goes down to the wire but the US doesn’t default. However, professionals are split over what might happen if the US government actually tumbles over the precipice.
About 60% of retail investors expect Treasury 10-year debt to weaken in the case of a default. The yield on the benchmark US note ended last week at 3.46%, around 63 basis points below its high for the year.
In the meantime, the debt ceiling impasse has driven up the yield on some very short-dated securities that are seen as most at risk of a delayed payment, fueling distortions in the bills curve.
The most elevated rates are those around early June, close to the point that Treasury Secretary Janet Yellen has warned the US might run out of borrowing headroom.
If the department can make it past mid-June, then it’s likely to get a bit of breathing room from expected tax payments and other measures, before facing fresh challenges from late July, where market pricing also indicates a degree of strain and concern.
In the 2011 standoff — which led to a credit rating downgrade by S&P but not an actual default — a surge in Treasury buying took the 10-year yield to a then-record low, while gold rallied and trillions were wiped off global equity values.
Investment professionals are less pessimistic on the outlook for the S&P 500 Index this time than retail traders.
“If we do see a short period of default, the market reaction would put pressure on Congress to raise the debt ceiling,” said Priya Misra, head of rates strategy at TD Securities.
Some investors believe that the debt ceiling drama has already caused some harm to the dollar, and 41% say its standing as the primary global reserve currency is at risk if the US defaults.
The risk of a pivot away from the greenback is something that investors are giving serious consideration. An earlier MLIV Pulse survey showed that a majority of respondents see the dollar making up less than half of global reserves within a decade.
MLIV Pulse is a weekly survey of Bloomberg News readers on the terminal and online, conducted by Bloomberg’s Markets Live team, which also runs a 24/7 MLIV Blog on the terminal.
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