Europe Seeks Alternative To Dollar Dominance - 70 Year Shift

Today’s AM fix was USD 1,313.25, EUR 965.84 and GBP 765.97 per ounce.
Friday’s AM fix was USD 1,321.50, EUR 972.34 and GBP 770.69 per ounce.      

The U.S. market was closed on Friday for a national holiday. Friday’s PM fix in London was USD 1,319.25, EUR  970.89 and GBP 769.02 per ounce.      

Reserve Currencies In History

Gold has fallen from a three month high and bullion for immediate delivery fell 0.5% to $1,314.38 an ounce in London.

The metal climbed to $1,332.33 on July 1, the highest price since March 24, and completed a fifth week of gains last week. This is bullish from a momentum perspective. Futures trading volumes were 19% lower than the average for the past 100 days for the time of day, according to data compiled by Bloomberg.

Europe May Seek Alternative To Dollar Dominance - 70 Year Shift

It was a gamble and it may have just backfired. When U.S. regulators last week sought to limit Banque Nationale de Paris’s ability to clear dollars they opened a pandora's box of uncertainty. Countries globally depend on the dollar for international payments. Many will have taken note and some will be alarmed by the move and will now naturally mull over alternatives.  

Today in Brussels the French Finance Minister, Michel Sapin, will start a debate with his EU counterparts on how the European Union can reduce its dependency on the U.S. dollar. Should the discussion find traction it may contribute to the ongoing monumental shift in global monetary economics with the gradual decline of the dollar as the global reserve currency.

Mr Sapin said in an interview with The Financial Times, “We [Europeans] are selling to ourselves in dollars, for instance when we sell planes. Is that necessary? I don’t think so. I think a rebalancing is possible and necessary, not just regarding the euro but also for the big currencies of the emerging countries, which account for more and more of global trade.”

The U.S. dollar has enjoyed reserve currency status for most of the past 70 years. This status confers enormous power to the dollar and allows the U.S. government to fund its trade deficits at very low cost.

Essentially reserve currency status means that most countries around the world and their respective banks will hold dollars (and dollar proxies such as U.S. treasury bonds) as part of their trade requirements.

Globally a massive 87% of all currency transactions have the U.S. dollar on one side, that is to say that most international trading involves buy and selling goods and services through U.S. dollars. Most central banks believe that the U.S. dollar is the only realistic alternative for such trade as the market is very liquid and has always been considered very safe.

Never before, to our knowledge, has the U.S. sought to limit, via limitations on access to the USD clearing systems, a key global institution (BNP) and a national champion of an important strategic ally (France), the right to trade internationally.

This policy shift represents an enormous risk for the U.S. and its trading partners and undermines what has always been implied that; that by clearing through the U.S. dollar a country can access, safely, the world capital markets while remaining sovereign.

It is important to note that that U.S. dollar supremacy began with the Bretton Woods agreement some 70 years ago.

In the aftermath of two devastating World Wars global leaders convened a conference that would set the economic rules for global economic activity. The delegates diagnosed that the causes for both World Wars lay in economic mismanagement by national governments and that a degree of global oversight and the application of a rules based approach was needed. The agreement led to the creation of the IMF and the World Bank with a mandate to intervene, alleviate and where possible prevent economic crises.

Recent unorthodox monetary policies, the issuance of money in the form of quantitative easing has left countries, primarily those in the EU, who have not pursued such measures at a serious disadvantage. As essentially, QE policy countries have effectively devalued their currencies relative to countries who did not participate.

Such poor coordination is in contravention with the principles of Bretton Woods and is keeping with unilateral type policies which preceded the outbreaks of both World Wars.

A key element of the agreement was the stability conferred upon the dollar by virtue of its peg to gold and global currencies peg to the dollar. The U.S. broke the dollar link to gold in 1971 and the USD became a fiat currency, backed only by “trust” in the U.S. government.

Today’s meeting speaks to the serious misgivings of parties and a breakdown in trust. There is a legitimate concern that this trust is now being abused for political purposes. This is misguided and not in the U.S. national interest and could backfire spectacularly.

After a period of relative calm, currency wars look set to escalate and will make owning gold important again in the coming months.

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