BRENT DONNELLY
CURRENCY TRADER, STRATEGIST, AND AUTHOR
INITIAL REACTIONS TO THE INVASION
TERMS OF TRADE SHOCK FOR EUROPE
• ENERGY PRICES EXPLODE
• FEARS OF A COLD WINTER IGNITE PANIC
• AFTER 6 MONTHS, THE WORST CASE SCENARIO IS PRICED IN
INITIAL REACTIONS TO THE INVASION
TERMS OF TRADE SHOCK FOR EUROPE
TERMS OF TRADE SHOCK: EUROPE
• GERMAN TRADE BALANCE COLLAPSES
• EURUSD PLUMMETS
• BAD FOR THE ECB… INFLATION WAS ALREADY A PROBLEM
TERMS OF TRADE SHOCK: JAPAN
• OIL PRICE RISE TRIGGERS PANIC BUYING OF USDJPY BY OIL IMPORTERS
• RISING YIELDS FORCE BOJ TO INTERVENE IN JGB MARKET TO CAP YIELDS
• PERFECT STORM FOR A DISORDERLY RISE IN USDJPY
THE FEAR
THE REALITY
THE REALITY: THE SHOCK WAS SHORT-LIVED
USDJPY REVERSED TOO, BUT NEEDED MOF HELP
WHAT ABOUT THE DOLLAR?
• EVEN AS THE DOLLAR RALLIED, SOME FEARED THAT CUTTING RUSSIA OFF FROM SWIFT AND SEIZING ITS RESERVES COULD HURT THE DOLLAR’S
GLOBAL STATURE
• COULD WEAPONIZATION OF THE DOLLAR TRIGGER DEDOLLARIZATION?
THE END OF THE DOLLAR?
SOUNDING THE ALARM
OVER THE US DOLLAR’S RESERVE STATUS AND US DEBT LEVELS ALWAYS SOUNDS SMART
IT’S A THEME THAT GETS CLICKS AND SELLS MAGAZINES
CONTEXT IS IMPORTANT: THIS IS A PERENNIAL, EVERGREEN THEME
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THE USA IS DOOMED. EVERY YEAR.
THE FEAR
THE REALITY: USD IS STABLE, AND ITS PERFORMANCE IS CYCLICAL
Actual performance: US DOLLAR, 1973 to now – No structural decline
THE REALITY
• GLOBAL DOLLAR USAGE IS STEADY OVER THE PAST 30 YEARS
Most used currencies in global transactions (1989 to now)
• USD AS A % OF CENTRAL BANK RESERVES FELL FROM 2003 TO 2010 BUT HAS BEEN STABLE SINCE
Source: BIS Triennial Report, 2022
THE REALITY
• PETRO YUAN AND YUAN AS A RESERVE CURRENCY ARE NOT HAPPENING IN ANY MEANINGFUL WAY
• CAPITAL CONTROLS AND OTHER ISSUES LIKE RULE OF LAW MAKE CNY UNATTRACTIVE
• DEEP US CAPITAL MARKETS AND RULE OF LAW ENSURE GLOBAL DOMINANCE OF USD FOR MANY DECADES
CONCLUSION
• FIAT CURRENCIES ARE SLOWLY MELTING UNDER THE HEAT OF EXTREMELY AGGRESSIVE FISCAL AND MONETARY POLICY, BUT THE USD IS THE CLEANEST DIRTY SHIRT
• THIS IS AN ARGUMENT FOR HARD ASSETS, NOT FOR THE END OF THE DOLLAR
• THE DECLINE OF THE AMERICAN EMPIRE AND LOSS OF RESERVE CURRENCY STATUS (IF IT HAPPENS) WILL TAKE MANY DECADES
• WORRYING ABOUT THE END OF THE DOLLAR IS NOT USEFUL ON ANY TRADING OR INVESTING TIME HORIZON
• THE VALUE OF THE DOLLAR IS CYCLICAL
• DEDOLLARIZATION IS NOT HAPPENING
“SLOWLY… THEN ALL AT ONCE”
ONLY SOUNDS SMART WHEN HEMINGWAY SAYS IT…
