Dollar Demonstrates Resilience Once Again

<p>Here's a
riddle for adults: countries stop using it, analysts predict its decline and
regression, but it continues to strengthen. What is it all about? If you
answered the U.S. dollar, you are absolutely right.</p><p>Despite
the expressed plans by BRICS leaders to <a href="https://www.reuters.com/markets/currencies/what-is-brics-currency-could-one-be-adopted-2023-08-23/#:~:text=BRICS%20leaders%20have%20said%20they,and%20many%20imports%20more%20expensive." target="_blank" rel="follow">increase the use of national currencies</a> for
trade and investment purposes, the dollar is still gaining dominance.</p><p>The
latest transaction data compiled by the Swift financial messaging service shows
that the dollar's role in international payments has never been more critical. For
example, in July, the percentage of transactions involving the dollar reached
an all-time high of 46%. </p><p>And
there are multiple reasons for the U.S. currency's resilience, including the
economy's strength and the Federal Reserve's hawkish stance. The lack of
certainty on a global scale in geopolitics also plays its part. </p><p>Which
would you prefer, a Eurozone currency that is one step away from recession or
perhaps <a href="https://uk.advfn.com/newspaper/igorkuchma/70184/china-growth-less-than-expected" target="_blank" rel="follow">China that is on the bridge to crisis</a>?</p><p>To be
fair, there is currently no viable alternative to the US dollar. Although the
Chinese currency is slowly integrating into the global monetary flow, its share
remains relatively small.</p><p>In July,
just over 3% of the instructions sent through Swift involved the yuan. </p><p>The
limited share of the world's second-largest economy's currency can be
attributed to its lack of free convertibility.</p><p>For
those who do not know, there are restrictions on foreign exchange transactions
in China, including foreign exchange and foreign currency withdrawals. </p><p>In
addition, the regulator occasionally intervenes in the foreign exchange market.
If the Chinese Communist Party decides to devalue its currency, it can do so.
Moreover, in the past, Beijing has periodically resorted to this practice to
support its economy.</p><p>However,
the current situation is quite the opposite.</p><p>With the
yuan falling against the dollar to its lowest level since 2007 amid China's
economic woes, the PBOC will have to sell reserves to strengthen its currency.</p><p>Incidentally,
this is where the biggest risk to the dollar lies today. If the Chinese
regulator starts selling <a href="https://en.wikipedia.org/wiki/United_States_Treasury_security" target="_blank" rel="follow">U.S. Treasuries</a> on a large scale, it could
cause chaos in the markets.</p><p>As the
supply of bonds increases, the debt market in the world's largest economy will
come under pressure, and this could subsequently spill over into equities,
leading to high volatility.</p><p>It is,
therefore, not surprising that money market fund assets reached a new all-time
high. Around $14.37 billion flowed into U.S. money market funds in the week
through Aug. 30.</p><p>What's
in store for the dollar?</p><p>The fact
that hedge funds are actively reducing short positions on the dollar indicates
that it is risky to bet against the US currency. The point is that to combat
inflation, there are two options: raise interest rates again, which could lead
to bankruptcies and a financial crisis, or cool the economy with a strong
dollar.</p><p>The
problem lies in the unexpected shift among analysts, who have collectively
started to predict further strengthening of the US dollar until the end of this
year.</p><p>As a
general rule, it is prudent to exercise caution when there is consensus, which
means that if there is a dovish stance next week, the <a href="https://www.tradingview.com/symbols/TVC-DXY/" target="_blank" rel="follow">DXY
index</a> could fall below the 104 mark.</p>

This article was written by FL Contributors at www.forexlive.com.