Russia’s attack on Ukraine in February 2022 has unleashed forces that will affect international relations and the global economy, but the outcome remains unclear for investors who are more focused on inflation and interest rates than geopolitical trends.
But the West’s resolve is being tested. Support for Ukraine has been undermined by the overwhelming success of far-right parties in recent European Union parliamentary elections. The biggest threat is France’s National Rally party, which won the most seats in the French parliament, forcing new national elections.
The US presidential election will determine whether President Biden will continue support for NATO and Ukraine if he is re-elected, or become more transactional if President Donald Trump wins.
Some observers have warned. Sanctions against Russia have led to a move away from the dollarReports suggest that a growing number of emerging market countries are joining the so-called BRICs coalition (Brazil, Russia, India, China and South Africa) to reduce their reliance on the dollar.
on the other hand, G7 agrees to provide Ukraine with nearly $50 billion in new aid It is taking advantage of profits from approximately $280 billion in frozen Russian funds, most of which are frozen in Europe.
For now, the threat of the dollar losing its status as the world’s number one currency is overblown. Survey results from the Official Monetary and Financial Institutions Forum.
According to the survey results, 18% of central banks plan to increase their dollar allocations over the next one to two years due to high interest rates in the United States. The percentage of Chinese central banks holdings of the yuan is expected to remain around 3% for the time being.
But there are two scenarios that could actually weaken the dollar over the next year or two: a moderate decline as the Fed eases monetary policy, or a dollar crisis that could lead to a loss of investor confidence.
The first scenario is more likely. There has not been a full-blown dollar crisis since the mid-to-late 1980s..
Currently, the inflation rate in the United States is About 3 percentThe main driver of the dollar is the interest rate differential between the United States and other countries. The dollar has been strong over the past year and a half mainly because the US economy has outperformed other countries and interest rate differentials have favored the dollar against the Japanese yen, euro and Chinese yuan.
If the Fed eases monetary policy in the future, the dollar could weaken. Latest “dot plot” study It expects just one rate cut of 25 basis points this year, but four cuts next year if inflation eases. This “soft landing” outcome could be accompanied by a continued rally in financial markets.
If the trade dispute with China intensifies, the risk of a dollar crisis will increase. Signs of increasing trade tensionsBiden recently announced higher tariffs on some Chinese imports, but a full-scale trade war would likely ensue if a Trump presidency were to double the tariffs imposed in 2018-2019.
During his campaign, President Trump has called for raising tariffs on Chinese goods by up to 60% and 10% on other imports, which, if implemented, would have a bigger impact on the US economy than the first round. Increase customs revenue It increased from 2% of U.S. imports to 17%. Greg Ip of The Wall Street Journal.
China is trying to bolster its economy by boosting exports and is evading U.S. tariffs by shifting production to Mexico and Vietnam, which is likely to escalate the trade dispute. But according to The Economist, a former aide to President Trump: Peter Navarro has advised imposing tariffs on Chinese goods produced in these countries..
President Trump’s trade negotiator, Robert Lighthizer, The US government should devalue the dollarTo improve the United States’ international price competitiveness.
The closest comparison to the current situation is the mid-1980s, when the United States was running record trade deficits and the dollar was unusually strong.
The Reagan administration attempted to weaken the dollar in an orderly manner by coordinating foreign exchange market intervention and monetary policy with Japan and Germany. Plaza Accord (1985) and Louvre Agreement (1987) But policy debates in the fall of 1987 led to a crisis in which the dollar plummeted, Treasury yields soared, and the stock market crashed.
History may not repeat itself this time, as US inflation expectations are now lower, and trade and current account imbalances are now smaller.
But what makes the situation even more precarious is the fact that China poses a threat to U.S. national security, which is the argument the Biden administration has used to maintain and increase tariffs on China.
What does this mean for the U.S. and global economies? Thirty-five years ago, the collapse of the Soviet bloc sparked growth in global trade. Comecon collapsed And Eastern European countries were integrated into Western Europe.
This time, the outcome could be the other way around: a trade war would break out, splitting the global trading system into two camps and forever destroying the post-World War II order that has contributed to peace and prosperity.
It is therefore incumbent on politicians on both sides to consider the possible unintended consequences of their policy actions before the situation gets out of hand.
Dr. Nicholas Sagen is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia Darden School of Business. He said:“Global Shock: An Investment Guide for Turmoil Markets”
