Luis Alcaide | The world is gradually moving towards a multiple reserve system. In its latest World Economic Outlook, the IMF notes that when the euro made its appearance, the dollar accounted for 71% of foreign exchange reserves. In the last quarter of 2020, dollar reserves held by central banks had fallen to 59%, the lowest share in the last 25 years.
The complaints in 1960 from the then French Finance Minister Giscart d’Estaing about the dollar’s status as a reserve currency, “its exorbitant privilege,” are a thing of history. US GDP now accounts for less than 25% of world GDP, while the dollar is depreciating against the euro and renminbi.
China is increasingly encouraging the use of the renminbi in its bilateral transactions. And, for the first time, the European Union will launch its own bond, neither German nor Spanish, to finance the post-pandemic recovery. In the Financial Times, John Plender draws on history to recall how it took ten years for the dollar to replace the pound as the reserve currency.
As for the US financial markets, stock prices are trading at the highest peaks but with on eye on the valleys, to examine and interpret the communiqués from the monetary authorities.
The Californian representative of the Federal Reserve encrypted his message with these words: “We are talking about talking about tapering”.
What has happened? The US Treasury bond yield has risen from 0.9% in January to 1.56% in April. A month in which the CPI was more than two percentage points above the 2% ceiling set by the Federal Reserve as a signal to turn off the tap: i.e. “tapering”.
What about banking risk? Its volume has been growing as interest rates were close to zero and collateral, for example in debtors’ Treasury bonds, is becoming less solid. A second alarm would be the bankruptcy of family office, ARCHEGOS, which has caused losses of 10 billion dollars to the lending banks. The clouds on the other side of the Atlantic and a warning, a sad reminder, but this time from this side of the pond, from the ECB: “exuberance in the financial markets.”
