U.S. Sanctions Boost Demand for Alternative Currencies
Federal Reserve Chairman Jerome Powell’s comments on inflation last Wednesday added fuel to the contra-dollar trade.
During a press conference following the Fed’s decision to leave interest rates unchanged, Powell said, “In order to move rates up, I would want to see inflation that's persistent and that's significant. A significant move up in inflation that's also persistent...
"To move inflation expectations up from where they are, which appears to be a bit below 2%, will not happen overnight."
In other words, the Fed won’t be satisfied until consumer prices rise much higher over time.
This “weak dollar” policy may come back to bite, though, as the Federal Reserve Note steadily loses credibility as world reserve currency.
Over the weekend, Treasury Secretary admitted as much.
“People don’t have to use the dollar, we have the right to put restrictions on people using the dollar. And over a long period of time, if we’re not careful, people will look at using other currencies,” Mnuchin said Saturday in a CNBC interview.
Despite insisting that “we are not weaponizing the U.S. dollar," Mnuchin’s Treasury Department is leveraging the dollar’s privileged status in international trade to impose and enforce economic sanctions against U.S. adversaries. They include North Korea, Venezuela, Iran, and Russia.
But as CNBC noted, “Officials in China and Europe have been actively promoting their currencies as substitutes for the dollar when it comes to both reserves and transactions, particularly in the face of expanding U.S. sanctions and protectionist trade policies like tariffs.”
The central banks of China and Russia are also steadily replacing their sizeable Federal Reserve Note reserves with gold.