The 2020 Currency War and the role of the US Dollar

As we step into June we have an opportunity to reflect on what has been on the media under card but only because so much has been happening elsewhere. Also we can note yet another fail for economics 101 because the advent of large-scale asset purchases or QE was supposed to cause a currency decline and maybe a large one. A higher supply of money leading to a fall in the price. The Ivory Towers of the central banks were keen on that one as they originally justified QE on the basis of being able to hit their inflation target partly via that route. Of course that has not gone well either as we noted with the ECB that has been on average some 0.7% below its holy grail of just below 2% per annum.

The US Dollar

So on that reading the world’s reserve currency the greenback should be in trouble as we observe this.

The Federal Reserve added $60 billion to its balance sheet last week, now totaling $7.097 trillion. Much of the increase this time (over $41 billion) was in corporate credit and commercial paper facilities. ( @LynAldenContact )

There is a sort of irony in US $60 billion in a week not seeming very much! Anyway the heat has been on.

The Federal Reserve’s balance sheet has expanded a staggering $1.9 trillion since February 26, just days after the S&P 500 peaked. ( @USGlobalETFs )

So plenty of new US Dollar liquidity and as part of that we recall what we might call the external supply which are the liquidity swaps for foreign central banks or US $449 billion.

To that can add an official interest-rate just above 0% ( roughly 0.1%)

Added to those factors the Financial Time has decided to put on its bovver boots and give the Dollar a written kicking.

That begs a question that has been seen as controversial — are we entering a post-dollar world? It might seem a straw-man question, given that more than 60 per cent of the world’s currency reserves are in dollars, which are also used for the vast majority of global commerce. The US Federal Reserve’s recent bolstering of dollar markets outside of the US, as a response to the coronavirus crisis, has given a further boost to global dollar dominance.

The FT writer has rather fumbled the ball there and later again emphasises a US Dollar strength.

Among the many reasons for central banks and global investors to hold US dollars, a key one is that oil is priced in dollars.

Indeed and we have looked at efforts to make ch-ch-changes from the supply side ( Russia) and the demand side ( China) but it remains dominant. There are of course plenty of other commodity markets which have a US Dollar price.

Next is something which intrigues me because if it is true in the US how do you even start with Japan and then of course you get a really rather long list of other countries doing exactly the same.

Finally, there are questions about the way in which the Fed’s unofficial backstopping of US government spending in the wake of the pandemic has politicised the money supply.

Oh and for those of you with inflation concerns ( me too) then this is close to an official denial.

The issue here isn’t really a risk of Weimar Republic-style inflation, at least not any time soon.

Actually the main inflation risk is in asset markets with the S&P 500 above 3k, the Nikkei 225 above 22,000 and the FTSE 100 above 6100 I think we can see clear evidence tight now. But of course the economics editorial line under Chris Giles is that asset prices are not part of inflation and should be ignored as part of his campaign to mislead on this subject.

Emerging Markets

If they were hoping for a US Dollar decline then such hopes have been dashed. One country which has been under the cosh is Brazil where an exchange to the US Dollar of 4 as we began the year has been replaced by one of 5.35 and even that is a fair bit better than the 5.96 at the nadir. Things have been less dramatic for the Argentine Peso but it had a bad 2019 to a move from 60 to the US Dollar to above 68 is further pain and of course an interest-rate of an eye-watering for these times of 38% has been required to restrict it to even that.


We have a sub-category all to itself as we note the currency of over a billion people. Let me start with something being debated in so many places, and here is the Economic Times of India from last Tuesday.

The government stimulus package of Rs 20 lakh crore seems to be inadequate to revive the economy, as a large part of it accounts for liquidity-boosting measures by RBI. It is clear that the weak fiscal position forced the government to restrict the stimulus. It is in this scenario, that the need for monetisation of deficit has been widely debated.

In layman’s language, monetisation of deficit means printing more money. In other words, monetisation of deficit happens when RBI buys government securities directly from the primary market to fund government’s expenses.

The Rupee has been a case of slip-sliding away as we note it nearly made 77 and is now 75.3 and that is in spite of the impact of the lower oil price ( and for a while much lower) on India.


This has not done much at all as I note an annual change of all of -0.38%! We did see some moves as it went to 1.14 at the height of the pandemic panic as the Euro’s “safe haven”  role was stronger than the Dollar’s one. But we then had a dip and now a bounce. So loads of column inches about the world’s main currency pair have led to a net not very much as we stand here today.


This is really rather similar to the above as we note an annual change of -.0,52% this time after a safe haven spell. Actually 107 or so for the Yen feels strong for it as we remind ourselves that the QE, negative interest-rates and equity purchases of Abenomics were supposed to keep it falling.

UK Pound

The annual picture ( -2%) is a little more misleading here as we have seen swings. The UK Pound £ has been following equity markets so went below US $1.15 at the nadir but has hit US $1.24 as we have bounced. Troubling if you are like me wondering about the equity market bounce. Still we could be the UK media that once again declared this at the bottom.

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine.

Places like the FT and BBC have proved very useful as when they have a “panic party” about the £ and claim it is looking over a cliff is invariably the time to buy it.


So we see that the situation is in fact one of where the various QE and interest-rate moves have offset more often than been different. In some ways the central banking “More! More! More!” culture means that differences in pace or size get ignored because they are all rocking a “To Infinity! And Beyond!” vibe as shown by the official denial below.

‘Comfortable’ Now, But On B/Sheet ‘Cannot Go To Infinity ( Jerome Powell via @LiveSquawk )

Let me conclude with another perspective which is the world of precious metals and another form of precious. One way of judging a currency is in this vein and as someone who recalls studying mercantilism which essentially revolved around country’s holdings of silver this provided some food for thought.

Those of us with longer memories have no faith in US paper dollars.  Prior to 1964, US coinage was made of 90% silver.  Today, a roll of 40 quarter dollar coins made of 90% silver, worth $10 in 1964, will cost you about $165.  The real purchasing power of the US dollar has plunged. ( h/t ahimsaka in the FT comments )


14 thoughts on “The 2020 Currency War and the role of the US Dollar

  1. Hello Shaun,

    Some gallows humor

    “Comfortable’ Now, But On B/Sheet ‘Cannot Go To Infinity ( Jerome Powell via @LiveSquawk )”

    the pilot of Pakistan International Airlines #8303 said he was ” comfortable” and we all know what happened there…….

    uh oh !


    PS: my condolences to all the families who lost loved ones in that crash

    • Hi Forbin

      Central bankers are like moths to a flame right now. Mr & Mrs Market know that all they have to do is create a bit of a storm and the central banks will ride over the horizon like the US Cavalry in a western. Especially to the man who coined “Not QE” last autumn.

  2. Shaun, your subjects are right on the money. No seems able too forecast whether the dollar will rise or crash with the monetisation. It seems that asset holders want the “bubble everything” to continue whereas Trump wants internationally competitive lower currency to adie re-shoring. Unfortunately for Trump he also wants the market and real estate to stay high, such is his ignorance.

    That said endless monetisation seems to protect the status quo (bubble everything) but in doing so it presents an ever closer and higher cliff edge when it destroys the status quo. The same cliff edge approaches with a dollar crash, an effective broadcast that dollar is no longer the reserve currency.

    As far as I can see as long as EURO, YEN, DOLLAR (and little old sterling) print in unison then the relatvie parities remain in place and bubbles are not popped. We only need one of the foundations to not keep up or crumble and it risks the relationships tearing apart.
    You need to move the slider to the right place…

    BR Paul C.

    • Marc Faber made a good comment regarding the stimulus effect of QE and ever lower interest rates back in the day, he likened the market response to a diver being required to jump off ever higher diving boards,the result will still be a freefall – just from a higher height, in the UK’s case that would be into an empty pool.

  3. Hello Shaun,

    re: “Today, a roll of 40 quarter dollar coins made of 90% silver, worth $10 in 1964, will cost you about $165. ”

    its not as if anyone up in charge doesn’t know this, or perhaps they forget their history lessons?

    “Around the year 210 BC, due to the economic problems caused by the Fourth Syrian War, the king of Egypt, Ptolemy IV (ruled 221-204 BC), devalued the currency in an attempt to recoup some of the costs of pursuing the war. Ptolemy IV changed the unit of currency in Egypt from the silver drachma to the copper drachma.

    Not understanding the nuances of inflation, other Ptolemaic kings allowed the cycle to continue for some time until King Ptolemy VI (reigned 180-145 BC) reintroduced silver drachmas back into circulation.

    The process happened again about 100 years later when Ptolemy XII (ruled 117-51 BC) devalued the currency by adding impurities to the coins. During the years 53 and 52 BC, the purity of silver coins dropped from ninety percent to thirty-three percent, which caused a major spike in the prices of goods”

    so nothing new under the sun then……..


    • Hi Forbin

      No, although these days it is more implicit rather than the explicit nature of debasing the silver or gold percentage in coinage. They prefer a softer default via 2% inflation targets and the like.

      Back in the day Henry VIII got the ball rolling according to “The Great Debasement and its Afteemouth.

      “Debasement had been common and quite severe throughout much of medieval Europe, especially in France, but it had been essentially nonexistent in England from the thirteenth to the sixteenth century. For approximately 400 years, England had maintained 92.5 percent purity for sterling, but with Henry’s debasement, the purity of coins gradually dropped to 75 percent, then to 50 percent, to 33 percent, and finally to 25 percent. A 1551 issue under Edward VI contained only 17 percent of the silver contained in pre-debasement issues.2 As a result, the earlier prestige of English coin, which at times had been the envy of northern Europe, quickly disintegrated over a brief period.”

  4. Great blog as usual, Shaun.
    If one looks at monthly changes the Canadian dollar has lost value since February. It took CAN$1.3286 to buy a US greenback in February as opposed to $1.4058 in April, although it was $1.3970 in May. The USMCA comes into force on July 1, and it contains Chapter 33, Macroeconomic Policies and Exchange Rate Matters, specifically designed to discourage currency wars among the North American countries. This may have contributed to the Bank of Canada’s sudden rejection of negative interest rates, not that I disagree with the decision. Not that it matters much, but there still seems to be a difference of opinion about what the effective lower bound of the overnight rate was. When the Bank of Canada put the overnight rate down to 0.25%, that was supposed to be it, but on Thursday, three members of the C.D. Howe Institute’s Monetary Policy Council called for the Bank of Canada to lower the overnight rate to 0.10% when it makes its interest rate announcement on Wednesday. I asked the C.D. Howe Institute last April what that would mean for the deposit rate, whether it would be -0.15%, or 0.10% or something else, but so far have received no response.
    The Canadian economy contracted at an annualized rate of 8.1% in 2020Q1 as compared to 2019Q4, not so bad as the 10% decline StatCan predicted in its flash estimate. This is still much worse than either the US (-5.0%) or Mexico (-6.25%). As Mark Warner notes below, what seems like an inevitable relocation of manufacturing by US firms from China to North America will benefit manufacturing in the whole region, it will likely benefit Mexico most, and Canada the least. So for the next while, Canada seems slated to be a smaller and smaller player within North America, and we can’t engage in a currency war with our neighbours to try to help matters.

  5. “monetisation of deficit”
    That must go into the annuls of financial twaddle speak along with the all time classic:
    “negative profits”

  6. If we can keep printing money with no inflation nor exchange rate effects, then we can keep buying tat from China forever without never having to lift a finger! Oh happy days.

  7. “Inflation can and does occur in a perfectly healthy economy. In fact, since 1913 when the Fed
    was founded inflation in the USA has consistently risen at 3.5% per year on average.3 One might
    assume that this means the country has experienced some great injustice, but the truth is that the
    1900’s were characterized by the greatest economic expansion and wealth creation the world has
    ever seen. Despite the common citation that “the $USD has lost 90% of its value” Americans
    experienced an unprecedented period of prosperity during this inflation. In fact, the prosperity
    became so gross in the 1990’s that Americans felt entitled to second homes, second cars, and
    just about every other luxury good known to man. What has not occurred is hyperinflation, which
    is a very different animal than inflation.”

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