Axios Markets

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.

• 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.

Axios' Bob Herman writes: The stock prices of AmerisourceBergen, Cardinal Health and McKesson plummeted yesterday after Bloomberg reported the drug distributors made an opening offer of $10 billion to settle their portion of the national opioids lawsuit.

Between the lines: That figure was a lot higher than Wall Street had expected for those companies, indicating that other defendants — including opioid manufacturers — likely would pay tens of billions of dollars to avoid going to trial.

The big picture: Barclays held an investor lunch in June to size up how much drug distributors could pay to settle allegations they were negligent in the shipping and monitoring of potent painkillers — allegations that have since been tied to newly released federal data.

• A legal expert at the lunch pegged the drug wholesalers' liabilities between $1 billion and $2 billion, far below the reported initial offer and the $45 billion counteroffer from states.
• "This may be just the starting point for negotiations, which suggests the actual liability could be higher," Barclays analysts warned Tuesday.

The bottom line: Millions of people have suffered from the opioid epidemic, and the litigation is so complex that a deal is far from certain.

• But the early numbers show that while a settlement would not bankrupt the major drug distributors, it's not an immaterial amount either.
• "Even if paid out over multiple decades, it's a potentially meaningful drag," analysts at Robert W. Baird & Co. wrote.

Despite Fed chair Jay Powell's "hawkish" rate cut last month, expectations for more cuts from the Fed are growing, thanks in large part to Trump and the trade war.

What's happening: Investors are now pricing in a 0% chance the Fed doesn't move at its next meeting in September and a nearly 50% likelihood of 3 rate cuts by year-end.

• Fed funds futures prices tracked by CME Group's FedWatch tool shows investors see an almost equal chance that the Fed will either cut rates by a full percentage point by its December meeting or that it cuts 25 bp — that's in addition to July's 0.25% cut.

Watch this space: The only reason for the Fed to cut rates by 1% or more in a year would be that the U.S. economy is in peril.

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.

Why it matters: The gold-buying binge is the latest move by China, Russia and emerging countries like Turkey to decouple themselves and the rest of the global financial system from the U.S. dollar.

The big picture: The status of the dollar as the world's funding currency is paramount to the U.S. position not just in global financial markets but in terms of its position as the world's major superpower.

Details: Central banks bought 224.4 tons of gold in just the second quarter, accounting for about 16% of total gold demand.

• Buying by central banks during the first 5 months of 2019 is 73% higher than a year earlier, with Turkey and Kazakhstan joining China and Russia as the 4 largest buyers, according to WGC data released last month.
• Poland has more than doubled its gold holdings over the past 2 years.

The intrigue: Rather than reverting to average, central banks are increasing from last year's pace when they set a record for gold buying that stretched back to the end of the gold standard in 1971, according to the Financial Times.

Flashback: China has been working to unsettle the dollar's hold on markets for years.

• The People's Bank of China in 2009 called for a global move away from the dollar after the market turbulence caused by the U.S.-induced global financial crisis.
• The Chinese central bank renewed those calls in 2013 after that year's U.S. government shutdown, and it has been increasing these efforts since Trump's election.
• China increased its holdings of gold for the 7th straight month in June — raising its total to more than 85 tons — and experts believe it could buy a record 150 tons of gold this year.

What's next? Gold buying looks set to continue as the ECB last week ended an agreement limiting sales of gold, mainly because large-volume selling among the region’s institutions has ceased and most have become net buyers.