April 12, 2023
Weekly Market Outlook
By Keith Schneider and Donn Goodman
Dollar Falling, Gold Rising. What’s the Plan?
The U.S. dollar has taken center stage in the world’s economy as major countries are reaching agreements to stop trading with the U.S. dollar and use their own currencies instead.
As the world’s reserve currency, the U.S. dollar is essentially the default currency in international trade and a global unit of account. Because of that, every central bank, Treasury/exchequer, and major firm on Earth keeps a large portion of their foreign exchange holdings in U.S. dollars. And because holders of dollars seek returns on those balances, the ubiquity of dollars drives a substantial portion of the demand for U.S. government bonds in world financial markets.
Perhaps not anymore.
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China, the Superpower Wants Things Their Way.
Two weeks ago, the Brazilian government, the largest economy in Latin America, revealed that they had reached an agreement with China, the prime opponent to U.S. economic power. Brazil wants to settle its immense trade with China in Chinese Yuan. As part of their arrangement, the two countries will be able to exchange their currencies directly. “The expectation is that they will reduce costs…promote even greater bilateral trade and facilitate investment,” the Brazilian Trade and Investment Promotion Agency said in a statement.
Last year, an unprecedented $150.5 billion in two-way trade occurred between China and Brazil, and China is engaged in similar activities with other nations, including Russia and Pakistan. Today, Brazil is the largest recipient of Chinese investment in Latin America, driven by spending on high-tension electricity transmission lines and oil extraction.
In the past, due mainly to the U.S. position as the global economic power, Brazil would first convert their purchases and trade to U.S. dollars before a transaction would occur with China. Not anymore. The idea that Brazil will transact with China directly without the U.S. intervention is just one of many countries, that no longer trust the U.S., to begin doing the same thing.
Times have changed around the world.
The U.S. dollar tends to go in cycles.
If the U.S. dollar declines further, what asset classes benefit?
As previously noted, U.S stocks have benefitted since the low reached in October 2022. Treasury yields across the spectrum have declined, and bond prices have rallied. But both stocks and bonds continue to weigh the impact of an economic slowdown and are rangebound.
Click thru to read more about the recent U.S. dollar weakness and how it may impact your investment portfolio, including:
- Why Large-Cap stocks have recently benefitted much more than small-cap stocks.
- A closer look at other asset classes – gold, silver, mining companies, and other commodity driven investments. How they may benefit from a falling U.S. dollar?
- Why 3 GOP Congresspeople recently introduced a Gold Standard Bill to stabilize the U.S. dollar?
- How you can take advantage of these emerging trends by investing with MGAM. Our All Weather Portfolio Blends can help you maneuver rough seas and sunny skies by using our quant investment methodologies to exploit different investment edges.
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