On August 5, 2019, the Dow Jones Industrial Index dropped nearly 800 points after China, in response to Trump’s latest round of tariffs ($300 billion worth), devalued the yuan below the “psychologically important” 7-per-1-dollar level.
Beijing claims the devaluation was a direct result of “market forces” rather than currency manipulation. Whether or not that was the case, we should just call it as we see it–the opening of an emerging currency war.
Trade wars and currency wars are two separate matters. But they often converge. One typically follows the other. And both have longer-term consequences with regard to the economies and currencies of those engaged. In light of yesterday’s events, American investors may be wondering how China’s move, when viewed from a larger context, may affect the US dollar. One major bank, JPMorgan, doesn’t think that the dollar will fare well in the coming engagement.
JPMorgan Warns: Diversify Awayfrom the Dollar
In a report published by JPMorgan Private Bank on July 10, 2019, Craig Cohen, JPMorgan’s FX, commodities, and rates strategist announced that the US dollar could lose its status as the world’s reserve currency.
Cohen writes, “we believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments.” To counter the risks that the dollar may pose, JPMorgan recommends “diversifying dollar exposure” into other international currencies “as well as precious metals.”
Describing how the dollar (following the Bretton Woods Agreement) had risen to a level of “exorbitant privilege,” one in which the US is “able to purchase imports and issue debt in its own currency and run persistent deficits seemingly without consequence,” the report states that “there is nothing to suggest that the dollar dominance should remain in perpetuity.”
“In fact, the dominant international currency has changed many times throughout history going back thousands of years as the world’s economic center has shifted.” Shifts in currency status are to be expected. What makes the US dollar any different?
After WWII, the US held the biggest share of world GDP, between 25% to over 40%, according to Cohen, if you take into account Western Europe with regard to the latter figure. But since then, global economic power has shifted, with China now at the epicenter of global growth.
“China is no longer just a manufacturer of low-cost goods as a growing share of corporate earnings is coming from “high value add” sectors like technology,” Cohen writes.
Since the end of WWII, China’s share of global GDP has increased by nearly 400%, it’s current total share–approximately 20%–now as large as that of the US. China has become a global superpower, and its share of global GDP is expected to expand in the coming years. But with investors focusing on China’s growth, the bigger picture tends to get lost, namely, the economies of India, Southeast Asia, and the Pacific–all of which now represent 50% of global GDP.
( The Article Was Originally Appeared on GSI Exchange )
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