Aug 7, 2019

A "Mar-a-Lago Accord" could weaken the dollar

Data: Investing.com, Macrotrends; Chart: Andrew Witherspoon/Axios

Fears of a major currency devaluation by China have gripped the market in recent days, but if history is a guide, it's really a dollar devaluation that should worry investors.

The big picture: President Trump's dissatisfaction with the dollar's strength and the boiling trade war with China are setting the stage for a second Plaza Accord, or this time a "Mar-a-Lago Accord," experts say, with the dollar falling and the yuan rising.

Why it matters: A weak dollar makes U.S. exports more competitive internationally, but also weakens Americans' purchasing power.

Background: In September 1985, the U.S. joined with France, Germany, Japan and the U.K. to create the Plaza Accord, an agreement to reduce the value of the dollar, particularly against the Japanese yen.

  • The value of the dollar fell by 51% versus the yen from 1985 to 1987, and by 1995, it had dropped more than 70%.

What they're saying: "The stronger dollar is bad not just for the US, but also for countries with significant amounts of dollar denominated debt. Think most emerging markets," Douglas Borthwick, managing partner at Makro Intelligence, tells Axios in a message.

  • "There comes a time when the dollar is so strong that it is destabilizing to the world economy. The way out of that is a Plaza Accord. A re-alignment of exchange rates."

How it works: In addition to helping U.S. multinational firms and emerging market countries with high amounts of debt in dollars — which gets more expensive as the dollar appreciates — major exporting countries in Europe as well as Japan would benefit from a stronger yuan because it would make their exports more competitive against China's.

What's next? Kuniyuki Hirai, head of trading at investment bank MUFG, says he sees the yuan falling as low as 6.05 per dollar in the not-too-distant future.

Yes, but: Many are skeptical of Trump's ability to reach a multilateral deal of this size and scope, given his general antagonism toward allies and adversaries alike, or that China would allow such an agreement. But China may not have a choice.

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Worry grows about China's falling currency and rising dollar debt

Data: Institute of International Finance; Chart: Axios Visuals

The Chinese government had put plans in place to reduce the high levels of debt in the country's economy this year, but the negative economic effects of the trade war have put those plans on the back burner and companies are again levering up, in large part with dollar-denominated debt.

Why it matters: As the yuan weakens, debts held in dollars get more expensive. That could pose a major problem for China should the economy continue to slow. It would also mean problems for the rest of the world, as China is the planet's No. 1 trading nation.

Go deeperArrowAug 12, 2019

Central banks want more gold, fewer dollars

Illustration: Rebecca Zisser/Axios

Led by Russia and China, the world is accelerating its move away from the U.S. dollar. But rather than increasing buys of other currencies, more of the world's financial authorities are buying gold.

Driving the news: Central banks purchased a record 374.1 tons — worth $15.7 billion — of gold in the first half of the year, the largest first-half increase in the 19-year history of the World Gold Council's (WGC) data.

Go deeperArrowAug 7, 2019

A great day for safe-haven assets

Photo: artpartner-images/Getty Images

The stock market rebounded Wednesday, with major U.S. indexes finishing the day slightly higher or little moved from where they opened, but prices on safe-haven assets like gold, the Japanese yen and U.S. government debt continued to rise.

What happened: Gold prices rose to a 6-year high, above $1,500 per troy ounce, while the yen broke through 106 per dollar, nearing a 5-month high, and U.S. Treasury prices rose, taking down yields on the benchmark 10-year note below 1.6% in early trading.

Go deeperArrowAug 8, 2019