Fitch Warns Biggest Threats To The Dollar's Global Supremacy Are At Home

Tyler Durden's picture

The US dollar will almost certainly remain the world's most important reserve currency for the foreseeable future but the lack of a ready substitute does not mean the dollar's current position is entirely assured, says Fitch Ratings in its latest Global Perspectives commentary.

No other currency offers the same set of advantages to money managers, including central banks, or is as deeply embedded in the global financial system. Crucially, the dollar is underpinned by the fact that the US Treasury market is the world's largest and most liquid for risk-free assets, and the Federal Reserve operates independently of government with respect to the market, and in implementing policy more broadly.

Calls for the dollar's displacement were relatively infrequent - although not entirely absent - when US monetary policy was exceptionally accommodative in the aftermath of the global financial crisis. That changed in mid-2013 when the Federal Reserve announced it would begin to slow its asset purchases, causing considerable turmoil in emerging markets (the "taper tantrum") and appeals to the Fed for greater consideration to be given to the international implications of its policy decisions. The Fed now appears poised not only to continue with policy interest rate hikes that began in December 2015, but to also consider the pace and magnitude of eventual balance-sheet reductions.

Perhaps the most plausible scenario for the dollar being meaningfully displaced does not begin with the emergence of a viable alternative, but rather it being undermined at home.

Two pieces of legislation currently working their way through Congress are the Federal Reserve Transparency Act (FRTA) and the Financial Choice Act (FCA).

The first would allow the Government Accountability Office to audit the monetary policy decisions of the Fed and make subsequent recommendations for administrative or legislative actions.

 

The second would restrict the Fed's ability to provide financial sector support to avert or address a crisis, and empower a commission to review and recommend changes to the Fed's operations, as well as to consider a rules-based rather than discretionary monetary policy framework.

It is the unambiguous intention of these legislative initiatives to curtail the independence of the Fed and allow for greater congressional oversight of monetary policy as well as the Fed's regulatory decisions and interventions related to financial stability.

If implemented, the proposals would diminish the appeal of the dollar as a reserve currency over time. Investors considering dollar assets and other dollar exposures would weigh the risk of political interference in monetary policy decisions and the possibility of the Fed's remit being broadened to include congressional priorities such as indirect funding of infrastructure investment. There may also be concerns about episodes of financial sector stress being deeper and more prolonged if the Fed's policy response options were explicitly limited.

Parties in favour of the FRTA and FCA might argue that the risks identified by those concerned about the Fed's independence - and, incidentally, the dollar's global role - are, in fact, the purpose of the proposed legislation, and that the overall economic interests of the US would be better served by their implementation. The debate is unlikely to end soon no matter the fate of the FRTA and FCA.

*  *  *

So Fitch is warning that if the world is granted more transparency into what The Fed does then that could end US hegemony? Just lucky that we elect the people who run what appears to be the world's most important institution... oh wait.

As we noted previously, US global geopolitical dominance is on the wane – driven on the one hand by the historic rise of China from its disproportionate lows and on the other to a host of internal US issues, from a crisis of American confidence in the core of the US economic model to general war weariness.

This is not to say that America’s position in the global system is on the brink of collapse. Far from it. The US will remain the greater of just two great powers for the foreseeable future as its “geopolitical multiplier”, boosted by its deeply embedded soft power and continuing commitment to the “free world” order, allows it to outperform its relative economic power. As America’s former Defence Secretary, Chuck Hagel, said in 2014, “We (the USA) do not engage in the world because we are a great nation. Rather, we are a great nation because we engage in the world.”

Nevertheless the US is losing its place as the sole dominant geopolitical superpower and history suggests that during such shifts geopolitical tensions structurally increase. If this analysis is correct then the rise in the past five years, and most notably in the past year, of global geopolitical tensions may well prove not temporary but structural to the current world system and the world may continue to experience more frequent, longer lasting and more far reaching geopolitical stresses than it has in at least two decades. If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead.

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Putrid_Scum's picture

Fitch is full of bullshit.

My boys are telling me The Reset is imminent.

The reason for The Reset is because there's a physical limit to the PONZI. And we've hit the limit.

The Reset was always inevitable, always a question of when not if. And The when has arrived.

Have a read, and good luck,

Putrid

www.beforethecollapse.com/2017/05/23/the-reset/

Giant Meteor's picture

Thank You ..

Good late night and early morning reading there ..

Fascinating ..

By the way, enjoyed your commentary there ...

And Also external links such as, http://thesaker.is/capitalism-requires-world-war/

Indeed Good Luck

yogibear's picture

Isn't Fitch along with Moody's the rating agencies that rated sub-prime/junk  bonds as triple A?

Nobody went to jail. They went on to do bigger schemes.

anarchitect's picture

"So Fitch is warning that if the world is granted more transparency into what The Fed does then that could end US hegemony? Just lucky that we elect the people who run what appears to be the world's most important institution... oh wait."

It will end dollar hegemony once everyone can see the Fed's interventions.  But electing the Fed?  Sure, that's the solution, given how well electing Congress and the President has worked out.  The Fed needs to be shut down, not audited or elected.  As does Congress.

August's picture

It will be a cold day in Hell before I believe advice, or anything else, coming out of a US "ratings agency".

Giant Meteor's picture

A bill you say, or two. Legislative you say .

Nobody is going to approve the killing of the golden goose. ..

 

Sokhmate's picture

Zbiggy dided, and no mention on ZH?

Batman11's picture

The Asian Century, sponsored by Western capital and businessmen.

Let's offshore everything for higher profits.

Let's invest in Asia for higher returns.

The West was starved of investment and went into decline.

What was supposed to happen?

This must have been the plan.

Batman11's picture

The removal of capital controls and free trade must have been Putin's plan to undermine the West.

It relied on the short termism of Western investors and businesses not to see the longer term consequences.

 

Mustafa Kemal's picture

Nice, trying to scare us away from those nasty thoughts of ending the fed.  

alphasammae's picture

"Federal Reserve operates independently of government with respect to the market" 

The FED is a money printing monopoly that trades paper securities and a ghost manipulator so as such it has lost global credibility.

yogibear's picture

The best way to rob a bank is to own one.

 

John Law Lives's picture

For the next act, maybe someone will shove Hank Paulson in front of a live mic to tell us the world will end if the Fed is audited.

Shove your advice up your arse, Fitch.

Fed_FUBAR

DavidFL's picture

What a bunch of BS! Perfect example of a planted story. Some people are very afraid of truth and transparency; especially thoes who have been feeding from the government trough for a hundred years!

msamour's picture

I agree with you. I got half-way down the article, and nothing in there passed the bull shit detection test. At least with a printed version I could line the cage of my parakeet...

Whenever you see the banking or financial industry complain about legislation is because they are afraid for their profits...

nathan1234's picture

If i recall some years ago when S & P tried fiddling with the US rating- they lost it's head.

Fitch's head will be on the block soon. Ratings are a bitch , of the bitches , by the bitches and for the bitches

 

fliebinite's picture

Transparency won't doom the dollar but it sure will spread some light on how the Fed bailed out european banking interests for political reasons.  This after US taxpayers have paid for the european social welfare state since WW2 by providing a military umbrella.  A welfare state where today muslims live on the dole and plan terrorism against europe and the US.  

The reality is that many banking super wealthy people are highly leveraged or invested in businesses that are highly leveraged.  If that debt is called from a plunge in equity value then a good portion of those leveraged super wealthy would have seen massive declines in their fortunes.  Therefore, a Fed sponsored bailout.

yogibear's picture

Central banks doing Zimbabwe economics American style.

US dollar should be lower.

spanish inquisition's picture

There is no "Risk Free".

Fitch - "If you don't look inside the FED, you can keep the fraud alive."

Stormtrooper's picture

Had to go back to the beginning of the article to see if it was written by George Soros.  It was actually written by Anonymous so I guess that I should pay attention to their ideas. /S

Congress created the Federal Reserve and Congress should absolutely be carrying out a much higer level of oversight and control.

Ink Pusher's picture

Fitch is a whole year behind my call if you've been paying attention.

The USD's days as the WRC are indeed numbered and one of the Gold Backed Currencies will replace it.

The questions is not an " if " anymore.... it's 'when'.

wholy1's picture

Considering the source - IGNORE !!!   I really get off on all these "financial ANALyst/investors/traders/portfolio mgrs/raters/eCONomist etal, contributing WHAT to REAL P-R-O-D-U-C-T-I-V-E enterprise?  How about . . .  NOTHING/NADA/ZILCH! P-A-R-A-S-I-T-E-S margined to the max and fixated on the [paper] "birds in the [phantom] bush".  Exciting times watching for the "Quickening's Witching Hour" when even ESF, [NOT]Federal[NO]Reserve and other CB interventions can no longer mitigate such things as US Treasuries redemptions and derivative defaults; AND . . . the [D]elites "exit, stage left"/bug-out to their remote digs under cover of a big-ass world war.  Bring it on, bring it on - hoo-wah !!!  When the MOAFR - Mother-Of-All Financial Resets - happens, will you be inland RURAL, GROUPED, GUNNED, GARDENED, PROVISIONED and . . . S-I-M-P-L-I-F-I-E-D on an UNaddressed/UNencumbered portion of ARABLE county dirt?