Iran, China Seek to Loosen Dollar’s Grip on Global Markets

Iran, China among those trying to end dominance of the U.S. currency

A small but growing number of countries are stepping up efforts to wean themselves off the dollar, aiming to chip away at the U.S. currency’s decadeslong dominance.

Iran last week became the latest when it pledged to replace the dollar with the euro in its foreign currency accounting.

China introduced the world’s first yuan-denominated oil contracts last month, part of a continuing effort to raise its currency’s global profile, while Venezuela launched a bitcoin-like cryptocurrency earlier this year. Russia has ramped up its gold reserves to diversify away from the dollar. Still, none of these new efforts has threatened the dollar’s global role.

Some analysts say the governments moving against the dollar may be trying to capitalize on growing unease among many nations, including U.S. allies, over recent or perceived shifts in U.S. trade policy, Washington’s approach to global alliances, and conflicting signals from the Trump administration about its preference for a strong dollar.

Share of countries anchoring their currencies to the dollar:

Increased uncertainty on those fronts could eventually fuel additional efforts to create an alternative to the dollar. For now, however, the attempts are unlikely to succeed, analysts and economists say, just as previous efforts had little or no success.

“The U.S. has been using financial sanctions very aggressively so, of course, countries like Russia and Iran will do what they can to move away from the dollar,” said Kenneth Rogoff, a professor at Harvard University and the former chief economist of the International Monetary Fund.

For other nations, boosting use of their currency would require substantial changes in policy. China’s yuan, for example, is unlikely to increase its tiny share in global transactions until Beijing removes longstanding curbs on foreign investment, an effort that could take many years, analysts said.

The dollar’s dominance looks secure. Nearly 60% of all countries, accounting for 76% of the world’s gross domestic product, had exchange rate regimes that were in some way anchored to the dollar in 2015, Mr. Rogoff’s research found.

The U.S. currency is involved in nearly nine out of every 10 transactions in the daily $5.1 trillion foreign-exchange market, data from the Bank for International Settlements showed. The dollar makes up nearly two-thirds of the $11.42 trillion in foreign exchange reserves held by central banks.

Over recent decades, there has been “a stunning rise in the dominance of the dollar,” Mr. Rogoff said.

Shares of central bank currency reserves:

In fact, most nations would agree that there is a global benefit to doing business in one main currency, since it is easier and cheaper for companies to conduct international business and for investors to buy and sell commodities.

The euro gained traction internationally after its introduction in 1999, with a rise in cross-border lending denominated in the currency. But when the eurozone’s sovereign debt crisis raised the specter of countries defaulting on their debt, the chances of it supplanting the dollar were dashed.

In 2009, the euro peaked at 28% of global FX reserves. In most recent data, the single currency made up around 20%, though some analysts expect that to move higher as the European Central Bank winds down stimulus and reverts to more traditional monetary policy.

The dollar’s 6% decline over the past year reflects in part confusion over the Trump administration’s policies on trade and other issues, said Barry Eichengreen, professor of economics at the University of California, Berkeley.

Administration officials have also at times offered conflicting signals on whether the U.S. favors a strong dollar, breaking a decades-old precedent of officials saying that a strong currency is in the country’s best interest.

In January, U.S. Treasury Secretary Steven Mnuchin said a weaker dollar in the short term would be good for U.S. trade. Several days later, he said his comments had been taken out of context and reiterated that, in the long run, a stronger dollar “is a sign of the economic success of the U.S.”

Iran’s recent efforts aren’t its first attempt to back away from the U.S. currency. And former Venezuelan and Iranian presidents Hugo Chávez and Mahmoud Ahmadinejad once cheered earlier declines in the value of the dollar, suggesting oil would be priced better in euros.

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Yet oil markets are still overwhelmingly priced in U.S. dollars, as are nearly all other raw materials. The Iranian rial has dropped by more than three-quarters against the dollar since then, declining 14% since the beginning of this year alone, leaving citizens lining up to exchange rials for foreign currency in the capital city this month. The Venezuelan bolivar has lost almost all of its value over the same period.

China’s efforts to use the yuan to create an oil benchmark that will rival those in New York and London “look to be a non-starter,” the Council on Foreign Relations said in a report. In February, the yuan made up just 1.6% of domestic and international payments, according to financial transactions firm SWIFT. As a share of currency reserves, the yuan represents 1.2%.

Those attempts would likely be more successful if officials removed capital controls, as currencies that foreigners can save and invest efficiently are always preferred for international transactions.

“China’s bond market is just way too small to support a truly global renminbi,” said Benn Steil, CFR’s director of international economics.


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Author: Mike Bird and Ira Iosebashvili
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Fed Minutes Signal Greater Confidence in Reaching 2% Inflation

Central bankers at last month’s policy meeting believed the economy would run hot for the next few years

Federal Reserve officials at their meeting last month expressed greater confidence inflation would rise to their 2% target over the coming year, a development that could affect how much they raise interest rates in coming years.

They also debated the costs and benefits of allowing the economy to run hot and discussed how they might need to later raise rates to a level that would deliberately slow growth, according to minutes of their March 20-21 meeting, which were released Wednesday.

The minutes highlight just how much Fed officials’ outlook has changed since last fall, when surprisingly slow inflation raised questions about the need for continued rate increases.

Fed officials last month believed the economy would run hot, or grow faster than its sustainable rate, for the next few years, the minutes said.

In March, “all participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months,” the minutes said. In addition, “all participants expected inflation on a 12-month basis to move up in coming months.”

The outlook has shifted since late last year because Congress and the White House approved tax cuts and a boost in federal government spending for this year and next. The economy hasn’t often had such fiscal stimulus when unemployment is so low.

Last year, falling unemployment supported the case for rate increases. The jobless rate has held at 4.1% since last October, near an 18-year low.

But inflation pressures softened last year, bolstering arguments in favor of slowing the pace of rate rises. At the time, top Fed officials said they expected the slowdown would prove transitory, and inflation pressures have firmed up in recent months.

Officials noted the potential benefits of letting the economy run hot, such as drawing more Americans into the workforce from the sidelines and speeding inflation’s return toward the central bank’s 2% goal. The policy makers also noted potential costs: “An overheated economy could result in significant inflation pressure or lead to financial instability,” the minutes said.

The Fed seeks to keep inflation at 2% because it views that level as consistent with an economy with healthy demand for goods and services.

At the same time, some officials warned they eventually could need to lift rates to a level that would deliberately restrict growth.

Some officials said they might need to acknowledge in future postmeeting policy statements that interest rates eventually would rise from a low level that spurs growth “to being a neutral or restraining factor for economic activity,” the minutes said.

After holding its benchmark federal-funds rate near zero for seven years, the Fed has raised it six times since late 2015, most recently last month to a range between 1.5% and 1.75%. Officials also penciled in two more quarter-percentage-point rate increases in 2018 and three such moves in 2019.

The Fed isn’t likely to raise rates at its next meeting, May 1-2, but investors largely expect another quarter-percentage-point increase at the following meeting in June. Investors have focused more attention on whether the Fed will feel pressure to add a fourth rate increase this year. The answer largely turns on inflation.

Of the 15 Fed officials at March’s meeting, 12 penciled in either three or four rate increases for 2018, and they were equally divided between those two paths. Most officials also penciled in at least three rate increases for 2019.

If Fed officials grow more confident that inflation is rising toward their 2% target over time, they could stick to their tentative plan for three rate increases this year. But if it looks like new federal spending, tax cuts, a weaker dollar and lower unemployment will lead to an acceleration in price pressures, policy makers could act more aggressively.

Consumer prices excluding volatile food and energy items rose 2.1% in March from a year earlier, according to the so-called core consumer-price index, released by the Labor Department Wednesday. That was the strongest reading since February 2017.

Economists at JPMorgan Chase estimate the Fed’s preferred inflation gauge, produced by the Commerce Department, will show annual core inflation of 1.9% in March when it is released later this month. In February, it was 1.6%.

Annual inflation is expected to rise in coming months because the weak monthly readings of last March and April will no longer be included in year-over-year comparisons, the minutes said.

This upturn is “widely expected and, by itself, would not justify a change in the projected path for the federal-funds rate,” the minutes said.

While the minutes show Fed officials are optimistic about economic growth, the prospect of trade fights loomed as one significant concern.

“A strong majority” of Fed officials saw the prospect of retaliatory trade actions by other countries as a risk for the U.S. economy, the minutes said. Officials’ contacts in the agriculture industry reported “feeling particularly vulnerable to retaliation.”


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Author: Nick Timiraos 
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