Welcome To The International Roles Of The U.S. Dollar

Friday morning, January 17, 2022, Federal Reserve chairman Jerome Powell welcomed participants to the “inaugural conference” on the International Roles of the U.S. Dollar.

Note that the conference was held at the new Martin Conference Center, a facility named after former Federal Reserve Chairman William McChesney Martin. Naming the center after Mr. Martin was a well-deserved recognition of one of the Fed’s premier leaders.

Mr. Martin led the Federal Reserve through the post-World War II period and was a major factor in building the money and banking system following the war and also establishing the U.S. dollar as a major reserve currency, soon to be the primary reserve currency, in the world.

Mr. Martin was the Chairman of the Fed from April 2, 1951, until January 31, 1970. The U.S. economy prospered during the time Mr. Martin was in office as the modern monetary system evolved.

It might be noted that Mr. Martin was replaced by Arthur Burns, the economist and close associate of President Richard M. Nixon. The only real qualification Mr. Burns had for taking over the lead position at the Fed was his close affiliation with the President.

President Nixon wanted to retire Mr. Martin because Mr. Martin was interested in controlling inflation and Mr. Nixon did not see that kind of monetary policy getting him re-elected as president in 1972. And, before that election, Mr. Nixon took the United States off the gold standard and froze wages and prices.

Mr. Burns backed Mr. Nixon all the way, something Mr. Martin would not have done.

History

This little bit of history ties us in with events going on today.

Inflation is a major problem. The Federal Reserve is committed to fighting that problem. And, another president is facing challenging mid-term elections this year with a presidential election coming up in the very near future.

Current Fed Chair, Mr. Powell, makes note of this in his introductory remarks:

“The international financial and monetary system that emerged after World War II has been defined by the centrality of the dollar. It is the world’s reserve currency and the most widely used for payments and investments.”

“This global preeminence has been supported by the depth and liquidity of U.S. financial markets, the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and international trust in U.S. institution and the rule of law.”

And, it is this role of trust that is certainly at the foundation of the dollar’s position.

China Efforts

The role of trust is central to the battle that is now going on in the world as China attempts to supplement its major role in the world economy.

For several decades now, the Chinese have been building their economy into one of the major producers in the world.

Since 2000, China’s share of global gross domestic product has almost quintupled from 4 percent to 18 percent and its share of global trade has quadrupled to 15 percent. No other country has grown faster.

Along with this, China has hoped to grow its financial position in the world and power its currency, the Renminbi, into a major reserve currency.

Ruchir Sharma, chair of Rockefeller International, writes in the Financial Times that

“The hurdle is trust.”

Mr. Sharma writes that

“foreigners are wary of a meddling state, but more importantly, the Chinese distrust their own financial system.”

The reason?

“China has turned financially inward.”

“Global doubt about China’s markets limits the renminbi’s appeal. Today, over half of all countries use the dollar as their anchor, a soft peg to manage their currencies.”

“About 90 percent of foreign exchange transactions involve the U.S. dollar, while only 5 percent use renminbi.”

“Today, the renminbi is not viewed as a safe haven….”

The U.S. Dollar

Where the renminbi has seemingly fallen into disfavor, the U.S. dollar remains well respected.

And, the fall has come since the Chinese got World Bank approval in 2016 for the renminbi to be used as a reserve currency.

Whereas China seems to have turned into itself since that time, the U.S. seems to have stepped out.

Since, 2014, the leaders of the Federal Reserve have seemed to support a strong dollar and have conducted monetary policy so as to have caused the value of the U.S. dollar to rise over time.

For example, Janet Yellen was the Federal Reserve Chair from February 13, 2014, to March 5, 2018.

During this time the Nominal Broad U.S. Dollar Index rose by 14.2 percent during this time period.

The U.S. dollar rose in value against the Euro by 9.5 percent.

Note, that during the last half of Ms. Yellen’s tenure at the Fed, she was out of favor at the Trump White House, and this resulted in some easing off on the rising value of the dollar.

But, when Jerome Powell replaced Ms. Yellen, the value of the U.S. Dollar began to rise once again.

From March 5, 2018, to March 2, 2020, the Nominal Broad U.S. Dollar Index rose by 15.8 percent.

Then came the Covid-19 pandemic, the recession connected with the pandemic, and then the Fed’s fight against the spread of financial distress within the U.S. economy.

The value of the U.S. dollar turned up again early in June 2021. And, from June 1, 2021, until June 17, 2022, the Nominal Broad U.S. Dollar Index rose 8.7 percent.

Bottom line, the Federal Reserve, under the leadership of Janet Yellen and Jerome Powell, has seen the value of the U.S. dollar rise over the past eight years.

Furthermore, there have been several times during this period when financial conditions in the world have resulted in major amounts of risk-averse money in the world flow toward “safe haven” markets.

The United States economy has been one of the major recipients of this-averse money and has proven to be one of the primary safe havens in the world.

In 2017, the U.S. was number 3 in receiving international capital flows. In 2018, it moved into the number 2 position in the world. In 2020, the U.S. moved into first place and has remained there.

Mr. Sharma remarks,

“The renminbi is not viewed as a safe haven.”

Chinese leaders understand that to achieve the goals that it has set out for itself, it must, someday, become a financial superpower.

The Chinese, for example, have seen what the U.S. has done to Russia in sanctioning so much of its activity.

China wants to have this power.

Right now, Mr. Sharma admits, China has neither the confidence nor the ability to make the right moves in this area. And, this shortfall will limit exactly what China can do in this space.

This must change if China really wants to achieve its goals.

Mr. Powell And The Fed

Mr. Powell and the Fed seem to know what they need to do to keep China from changing the picture.

The United States must have a very strong currency and must retain its position as the number one reserve currency of the world.

In all the other distractions that the Fed is facing these days, it must not lose sight of its responsibility for keeping the dollar strong.

It appears that the Fed fully realizes this and with programs like the one just introduced last Friday by Mr. Powell, it intends to keep the subject of the strong dollar in the eyes of the world.

This is what it should be doing.

Furthermore, this effort represents a tremendous salute to “Bill Martin,” one of the best Federal Reserve leaders we have ever had.