Geopolitical risks against the US dollar

It is a logical consequence of the Federal Reserve's trend in normalization of the policy to strengthen the US dollar which is subject to new threats. The development of which can lead to serious changes in the foreign exchange market.

China

The trade war is becoming protracted. The volume of Chinese imports are subject to increase tariffs and has risen to 250 billion. Moreover, Trump unequivocally announced that he is ready to extend this practice to all imports from China if he does not accept American conditions.

China does not express such readiness. The retaliatory measures are taken on the volume of 110 billion US imports while the devaluation of the yuan continues, besides, China outlined a number of financial measures to support production. China does not intend to make any concessions because the US demands actually force the Chinese side to abandon the development strategy adopted at the last congress of the CPC, which is absolutely unacceptable.

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In the trade between China and the US, there is a clear imbalance in favor of China, which at first glance, creates advantages for the American side, but in order to protect the Chinese economy, it will consistently get rid of the dollar in external economic calculations.

Thus, in the long term, the US faces a serious threat of reducing the financing of the growth of the US public debt by China, and this threat is much stronger than the trade distortion, as it will lead to an intensification of the de-dollarization of the world economy.

European Union

On August 7, the European Union put in place regulations that annul any extraterritorial sanctions of the United States against Iran and explicitly prohibit European companies from fulfilling them. Immediately after the enactment of the regulation, European companies will have the right to remedy the damage from sanctions in court, and any court decisions in support of sanctions on the territory of the European Union are declared null and void.

This decision very clearly describes the situation that develops between the EU and the US but the European Union will not pay for the re-industrialization of the American economy and will not finance the growing hole in the US budget. The consequence of the adoption of this regulation could either be the US refusal to exert pressure on Iran, which is unlikely, or the escalation of tensions between Europe and the United States.

Cryptocurrency

On August 7, the US SEC commission postponed the decision on the application for approval of stock exchange investment funds tied to the price of bitcoin until September 30. This application was published in the Federal Register on July 2, and cryptornics were preparing for an ETF decision at an accelerated pace, allowing the creation of a mechanism for institutional investors to enter cryptology.

Why is it important? At the moment, there is no mechanism for the legal regulation of such funds, despite the huge interest in crypto-currencies. This restriction does not enable large investment funds to enter cryptology, which does not have the right to dispose of investors' money without an appropriate authorization mechanism.

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At the same time, the world's largest chief support banks are actively preparing for the fact that the cryptocurrencies will begin to expand into the sphere of world finance. After the legal base is prepared, it will determine that the crypto-currencies largely correspond to all the criteria of money - the speed of settlements, security, etc. A mechanism will appear that will make it possible to exclude the dollar from the sphere of interbank and interstate settlements, that is, the dollar will lose some of the functions of the dominant world currency.

Summarizing the foregoing, let us note that the world is preparing for the cardinal changes in the configuration of the world financial system at an accelerated pace. Trump's tax reform significantly reduced budget revenues that are for compensation, an attempt is made to shift part of the costs to the main US trading partners. This attempt with a high probability will give only a short-term effect as for the long term the effect will be reversed - the main global players will reduce the scope of the US dollar in their foreign trade activities.

In months of August and September, players will review the main criteria for predicting the demand for currencies. Instead of traditional parameters -such as employment, inflation and GDP growth rates, the trade balance- the budget deficit and the rate of growth of public debt will come to the forefront. If these parameters show negative dynamics, the trend for dollar growth will end regardless of the chosen rate of the Fed's monetary policy normalization.

The material has been provided by InstaForex Company - www.instaforex.com