US Dollar

De-facto Currency

The Federal Reserve plays an outsize role in driving global economic expansion and contraction.
How the U.S. dollar emerged as a de-facto global currency.
Trade tensions, tariffs, and cracks in the dollar’s dominance and overall global liquidity.
Hedge portfolio risks with gold.

Global central bankers and other international policymakers convened at Jackson Hole, Wyoming in August 2019 and found themselves discussing a decades-old conundrum that has found new legs in the world economy: the increasing dominance of the U.S. dollar in global transactions. Mark Carney, the governor of the Bank of England, went so far as to revive an observation credited to President Nixon’s then-Treasury Chief, John Connally, who noted that the “dollar is our currency, but your problem.” Carney went so far as to suggest a global digital currency that relies on new technologies and that could be controlled by public authorities.

Almost fifty years ago, the United States abandoned the post-World War II Bretton Woods standards and decoupled the dollar from gold, setting the stage for expansion not just of U.S. industry and trade but also for the economies of countries around the globe. Those countries implicitly, and in some instances explicitly adopted the dollar as a universal standard of value.  Without the constraints of a gold standard, the U.S. Federal Reserve pumped trillions of dollars into the national and global economies. This had a natural inflationary effect, but it also spurred new opportunities and a massive expansion in global trade.

The expansions and contractions that have elapsed without the discipline of a gold standard have given economists and policymakers new insights into cycles of global liquidity and leveraging, and the conclusions are not necessarily all good news. The dollar’s dominance in global trade means that every time any internal or external threats arise to dollar supply and liquidity, the global economy will tighten very quickly. The trade and tariff rhetoric between China and the United States is evidence of this. Investors with short-term investment strategies and plans are reacting to these downturns by shifting assets from dollar holdings and into gold.

Image

Source: ZeroHedge

The Federal Reserve can seemingly dictate expansion or contraction

When countries ran their economies in lockstep with their gold reserves, currency deficits and surpluses had real and immediate ramifications on the ability of their industrial bases to compete in a global economy. With currencies and gold going their separate ways, those ramifications were no longer as significant a concern. Countries could boost currency liquidity with no constraints and enable their industries to participate in a global financialized economy.

As the U.S. dollar became the de facto default medium of exchange in this economy, Connally’s prediction that the dollar is “your problem” came to pass. The Federal Reserve can adjust dollar supply and liquidity to control a domestic economy, but the international economy can only expand when the Fed sees fit to expand the U.S. economy. Any liquidity reduction in the United States dollar creates an analogous reduction in the global economy.

It is no surprise, then, that investors are watching for any signs of weakness that might reveal contractions in the U.S. economy.  Consider, for example, the recent focus on the inverted yield curve, where interest rates on long-term Treasury bonds are falling below the rates on short-term bonds. Other signs of weakness that are scaring investors include reductions in manufacturing activity, lower corporate earnings after the 2018 U.S. tax cuts are fully accounted for, softer housing prices, and less consumer spending.

The high and mighty status of the US Dollar on the global stage

Contrarians emphasize reductions in the US dollar currency index and the emergence of other indicators, including the Chinese Renminbi as major global reserve currencies, to argue that the belief in the dollar’s predominance is overstated.

Image

Source: New View Economics

The dollar’s share of global central bank reserves has certainly dropped from 73 per cent to 62 & in the last twenty years. Nonetheless, the Renminbi accounts for only 4% of global currency transactions. A study by the National Bureau of Economic Research revealed that in 2018, the proportion of global imports priced in U.S. dollars was 4.7 times the total of U.S. imports, and global exports were 3.1 times total U.S. exports. These proportions dwarf the second-place Euro, which accounts for 1.2 times global imports and exports. Global transactions can move away from the dollar for another twenty or more years, during which time the Fed will continue to have an outsized influence will on global economy.

Before 1971, countries pegged their economies and transactions to a neutral and agnostic gold standard that no one country controlled. The dollar’s emergence shattered that neutrality and elevated the Federal Reserve into the role of a universal worldwide central bank.

What trade wars mean for global liquidity and leveraging

When the Fed expands the money supply and overall liquidity, interest rates go down and consumers and businesses binge on cheap credit. Critics point out that the credit binge that began in 2008 and the resulting global economic expansion were built on a nonexistent foundation. Any attempt to shut down the availability of cheap credit will inevitably expose the weakness of that foundation. Signs of the first crack became apparent in late 2018, when the spread between corporate and Treasury bond yields began to grow.

Image

Source: St. Louis Fed

Trade tensions and potential tariffs on Chinese goods are partly, if not wholly to blame on the first decline in Chinese auto sales in two decades. Germany reported its first sharp drop in industrial production since the global economic crisis of 2008-2009. It remains to be seen whether the Fed recent reduction in interest rates will offset the effects of trade wars.

That offset, however, can create a stronger dollar, which in turn will weaken other currencies and reduce global trade and liquidity. This runs counter to the attempts by the current administration to reduce current account deficits and to bring into balance the amount of goods that are imported into the United States with the amount exported. If U.S. current account deficits continue to drop, both industrialized countries and emerging economies will experience a reduction in global liquidity. Whether the situation would be the same if the U.S. dollar were not the de facto global currency is an academic question.

The greater question is what can an investor do to gain insulation from these conditions. This question has no simple answer, but investors can derive some direction if trade tensions continue and global liquidity continues to fall.

Trade tensions and tariffs can drive global transactions into currencies other than the U.S. dollar. Smart investors will watch the trends in the percentage of global currency reserves that are designated in U.S. dollars. If China and the United States are unable to resolve their trade and tariff disputes, those trends will likely continue to be on a downward slope.

If other countries experience further reductions in industrial activity, investors would be well served to hedge their risks in at least a portion of their portfolios.  Advisors have long recommended that investors hold between 1% and 5% of their total portfolios in gold. It may well be time to increase those percentages.


Image

RELIANCE ON INFORMATION AND DISCLAIMER
The information materials and opinions contained on this website are for general information and marketing purposes only, are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances or facts. This website may contain errors or erroneous information which should not be relied on. This website may contain sales puffery and should be verified by you. We suggest that you conduct your own due diligence prior to entering into any agreement with us.

 

Please read and review the following disclaimer and all other information before you proceed to any other part of this website. When you have completed your review, and you are confident that you understand the entire substance of this disclaimer and information, please click on the box labeled “I Accept” to signify your agreement to the terms and conditions that govern your use of this website and the information included on it. If you do not agree to these terms or conditions or you are not willing to click the designated box, you must exit without proceeding further.

 

We make no warranties, representations or undertakings about any of the content of this website (including, without limitation, any as to the quality, accuracy, completeness or fitness for any particular purpose of such content), or any content of any other website referred to or accessed by hyperlinks through this website. Although we make reasonable efforts to update the information on our site, we make no representations, warranties or guarantees, whether express or implied, that the content on our site is accurate, complete or up-to-date. You acknowledge that in entering into this website, you will not rely on and shall have no remedies in respect of any representation or warranty not set out in the final written Agreement between us, should there be one. You agree that you shall have no claim for innocent or negligent misrepresentation or negligent misstatement based on any statement in this website.

 

TERMS AND CONDITIONS OF YOUR ACCESS TO AND USE OF THIS WEBSITE: Astor Asset Management, LLC (the “Firm”) is a wholly owned St Kitts & Nevis limited liability company and maintains registrations through its stand-alone affiliates in Anguilla, Bahamas and Canada, (the “Company”) catering to Ultra High Net Worth (“UHNW”) clientele. The Firm and the Company have published information on this website (www.astorassetgroup.com) that may be accessed and used only by persons and entities that qualify as prospective or actual clients of the Firm and its sophisticated financial products and services.

 

Certain portions of this website refer or include links to products and services offered by third parties that may or may hold licenses from various jurisdictions. The Firm does not hold or maintain its own global financial licenses, and refers to third party services for informational and educational purposes only and not by way of endorsement or recommendation. But the Firm through its stand-alone affiliate Astor Capital Fund Ltd does maintain a Money Service Business license in Canada, (“MSB”) having an MSB Registration Number M21136919 under license from Financial Transactions and Reports Analysis Center of Canada (“FINTRAC”). The main office for MSB is 1730 St. Laurent Blvd, Ottawa, Ontario, Canada K1G5L1 and engages in authorized activities to its international (non-Canadian) clientele.

 

You have the sole and absolute responsibility and liability for your decisions that may be based on information you receive or derive from those third-party websites. Any person who accesses this website is solely responsible and liable for compliance with the applicable laws, rules, and regulations of the jurisdiction in which such person resides, or in which such person is currently located. The Firm shall have no liability for any person’s access to this website that originates from a jurisdiction in which such access may be prohibited.

 

Astor Asset Management operates strictly in accordance with the United States Securities Act of 1933 and the United States Securities and Exchange Act of 1934 (both, as amended), including all of the rules and regulations promulgated under both Acts. For full SEC registration and reporting details, including, without limitation, the Company’s S-1, Prospectus, Current Reports, 8-K, 10-K, and Annual Reports, please refer to the EDGAR Company Search Results for Astor Asset Management, LLC at www.sec.gov. Astor Asset Management, LLC files reports under Central Index Key (CIK) #0001488446. All of the Company’s reports reflect a fiscal year that ends on December 31.

 

The financial products and services that the Firm offers are not available in the United States of America and Canada or to citizens of the United States of America or Canada regardless of their residence. The Firm takes no position with respect to other jurisdictions, and any person who accesses this website is solely responsible for making such determination. No person, regardless of where such person is located, may rely or act upon any information contained in this website.

 

The Firm’s products and services are not suitable for all investors and the Firm offers no advice as to whether any specific product or service that it offers may be suitable for any person or entity, and such person or entity is solely responsible for seeking professional and independent financial, legal, and tax advice before considering an investment with or any participation in any of the Firm’s products or services.

 

By entering into a referral agreement or contract with the Firm you expressly give the Firm the right to contact you via electronic mail and courier with newsletters, promotions, events and marketing materials.

 

The Firm has not and does not solicit any person to utilize this website or to access any information in it. Every person that accesses this website is gaining such access through his or her own personal choice and option, and without encouragement from the Firm or any affiliate of the Firm.

 

Nothing in this website is, and in no part shall be, construed as a financial promotion or a solicitation to procure any of the Firm’s products or services. The Firm has taken great care not to promote any financial products or services on this website, and it is relying on the exemptions and exclusions that are available in different jurisdictions with respect to such disclaimers. The Firm has a strict policy of not soliciting the participation in, or offering financial products services to any jurisdiction in which those products or services are not allowed or authorized. You must contact the Firm immediately if you are the recipient of any solicitation or offer to procure products or services from the Firm.

 

The Firm makes no warranties, guarantees, or representations with respect to the accuracy or completeness of any information included in this website, or as to whether such information is error-free.

 

Your decision with respect to any of the Firm’s services or products is your sole and exclusive responsibility to make. The Firm will rebuff any requests for advice that you might make with respect to the products and services described in this website. You are acting on your own volition and initiative in taking any and every action in response to information that you derive from this website. Further, you bear sole responsibility and liability for compliance with all legal and regulatory requirements that may be applicable in the residential or domiciliary jurisdiction. The Firm is not offering or soliciting the sale of any securities or any other financial products or services through this website. The Firm takes no position as to local laws, regulations, rules or restrictions that may be applicable to your use of this website or the information in it. The Firm specifically warns all persons who access this website that the information in it is not to be utilized or distributed in the United States of America or Canada.

 

You are not authorized to copy, reproduce, or distribute any information in this website and you may not link into this website from any other website. The Firm not a registered investment advisor and is not a securities broker/dealer. The Firm conducts business only in those jurisdictions in which it has an applicable exemption or exclusion from registration requirements.

 

The Firm and its affiliates disclaim all responsibility for any access to this website that is contrary to applicable laws and restrictions. The Firm expressly disclaims all liability and responsibility for actions by its third-party contractor agents who act outside of the scope of their authority.

 

By your accessing of this website, the Firm assumes that you have read and reviewed these terms and conditions carefully and thoroughly, and that if you click the box labeled “I accept”, you are doing so with full and complete knowledge of these terms and conditions and as a confirmation that your local laws, rules, regulations, and restrictions allow you to access this website. Further, you are accessing this website without having been solicited by the Firm to gain such access, and you have verified that accessing this website does not violate the laws of your jurisdiction or domicile.

 

Your access of this website is also your representation and warranty, which the Firm may rely upon, that you are not located in or a citizen of the United States of America or Canada. The Firm has enacted measures to block access to this website from IP addresses that are located in the United States of America and Canada, and your use of a virtual private network, a TOR browser, or such other means that are intended to disguise your location is a violation of your right and opportunity to access this website. The Firm reserves full right and authority to prosecute such violations of these terms and conditions. Further, you are representing that you are acting on your own behalf and not on behalf of any third parties, including any third parties located in the United States of America or Canada.

 

Your access of this website is also your representation and warranty, which the Firm may rely upon, that you understand that the Firm is not, nor does not hold itself out to be, a securities broker-dealer, investment advisor, or underwriter licensed or registered with any securities regulatory authority. Astor does not engage in or promote products, activities, or services in jurisdictions where licensure and registration is required. Astor outsources to third-parties any clients, services, or activities as deemed necessary to comply with state, federal, and regulatory authority law. All information on this website is presented “as is”, and the Firm takes nor position on its correctness or completeness.

 

Astor Asset Management and its Astor subsidiaries are corporations organized and existing pursuant to the laws of the Anguilla, Bahamas, Canada and Federation of St Kitts & Nevis. The Firm conducts business out of these jurisdictions, and only with accredited UHNW investors that need sophisticated financial products. Our typical client is a founder and chairman of a publicly traded company, prominent celebrities and politicians.