The Strong Dollar And China

Recently, I posted an article on Seeking Alpha that discussed the role of China in the world financial system and examined recent Federal Reserve behavior within the context of China’s efforts to dominate.

As I discussed in the article, it seems as if the Federal Reserve has been pursuing a policy to achieve and sustain a strong dollar in the world’s monetary system so as to keep China from gaining a greater and greater role in this monetary system. Today, the second part of my argument fell into place.

Mike Rogers, former member of the U.S. Congress, wrote an op-ed piece in the Financial Times about how the world needs to get its act together, digitally, so as to give China a race for its efforts to attain control of the global financial system.

“While China has sought to bide its time and hide its capabilities, it is now embarking on an effort to remake global institutions in a manner that favors its values and approach.”

“The e-CNY (China’s digital currency” is representative of Beijing’s overall push to redefine the global economy and its financial rules.”

Mr. Rogers concedes that China has bided its time and has attempted to hide its capabilities. But, this is consistent with general Chinese practice. I learned a long time ago (in the 1990s) that Chinese leadership plans and executes its ideas over decades, whereas the United States tends to focus its plans and execute its ideas between elections. Since learning this, I have not been let down by the guidance of its wisdom.

China’s Movement

“China’s efforts in a range of international forums follow a pattern in which Beijing participates in the process, advancing policies that are in its own long-term interest and not necessarily those of the global economy.”

And, Mr. Rogers adds,

“When the IMF allowed the renminbi to become a reserve currency in 2016, the drive to unseat the dollar began in earnest.”

Looking at the record, the Federal Reserve, it seems, under the guidance of Ben Bernanke, roughly kept the value of the U.S. dollar constant during his tenure at the Fed. Bernanke handled the Great Recession and the period of economic expansion that followed. All-in-all, Mr. Bernanke did a very good job.

Janet Yellen became the Chair at the Federal Reserve on February 3, 2014. Very soon after Ms. Yellen took over the position the value of the U.S dollar began rising. In terms of the National Broad U.S. dollar index, the index rose from 94.9059 to 108.3648, a rise of 14.2 percent.

It should be noted that hardly any rise took place in the last two years of Ms. Yellen’s term. Ms. Yellen had been appointed by President Barack Obama. In the last two years of Ms. Yellen’s term, she lost the confidence of President Donald Trump and backed off from several of the goals she had been pursuing. The stronger U.S. dollar was one of them.

Mr. Trump did not reappoint Ms. Yellen. Instead, Mr. Trump nominated Jerome Powell to become the new Chairman of the Federal Reserve System. Mr. Powell took over on March 3, 2018. Soon after Mr. Powell took over, the value of the U.S. dollar began to rise again.

Note, as mentioned above, the Chinese renminbi became a reserve currency in 2016. So, China was in the reserve currency base going forward. And, Mr. Powell continued to oversee the rise in the value of the U.S. dollar up until February 2020 when the Covid-19 pandemic hit.

Between March 3, 2018, and January 31, 2020, the National Broad U.S. dollar index rose from 108.3648 to 115.7337, an increase of 6.8 percent. Of course, Mr. Powell and the Federal Reserve moved into a position to protect the U.S. financial system… and the world. The Fed flooded the financial system with liquidity. This effort followed through into 2021.

The value of the U.S. dollar began to rise again on June 1, 2021. On that date, the National Broad U.S. dollar Index was at 110.5378. On June 10, 2022, the index rested at 120.1624, showing an 8.7 percent increase since June 1, 2021. Overall, since Janet Yellen became the Fed chair, the value of the U.S. dollar, by this index, has risen 26.6 percent.

To many analysts, the U.S. dollar is getting close to parity with the Euro (it now costs a little over $1.04 to buy one Euro) and the U.K. pound (it now costs a little under $1.20 to buy one U.K. pound). On all fronts, the strength of the U.S. dollar in foreign exchange markets is very apparent.

Also, it is also very apparent that when “risk-averse” monies flow in the world, the U.S. is one of the major “safe havens” for these funds to go. Over the past four years, the U.S. has gone from number 3, in terms of capital flows in the world, to number 1 in the capital flows in 2019. The strength of the U.S. dollar is obviously a very important factor in where these monies go.

China’s Move Into Digital

The second aspect of this battle is the movement of the world into digital technology.

I am not going to write more here on this subject.

I wrote two major articles in March about this subject and all the research going on to find the future. These articles can be found here, and, here.

I would recommend both of these articles to you… I believe them to be very important.

Supply Side

The third aspect of this evolution is the technological and cultural environment that is changing all around us. The government has got to play a role. For one, resources are going to be needed to transition to the “new world.” China is laying out lots and lots of money to establish China’s play in this future.

Now, I don’t suggest that the U.S. government enter into a money battle with the Chinese over the future. But, I do believe that there is a major role for the U.S. government to provide an atmosphere and incentives to help stimulate the effort to create the future. I don’t see this governmental effort as a demand-side effort, however.

To me, the government needs to be very, very active on the supply side, helping to build the systems and the structures that will contribute to and help form the emerging structure. This is also where the suggestion made by Mr. Rogers in his Financial Times article fits in. Mr. Rogers says we need a “digital” Bretton Woods.

The original Bretton Woods system helped to establish the economic rules for the post-World War II era.

“The goal of a digital Bretton Woods would not be to constrain financial innovations or limit individual governments’ ability to act.”

Rather, the meeting would be about

“creating a set of norms informed by, and based on, liberal democratic values that will facilitate the next evolution of the global economy, while at the same time protecting the principles that gave birth to the modern world.”

Privacy and competition must be an integral part of any such system. That is, there is a lot of work that must be done to produce the next “world”.