Our Analytics 5 october — 13:07

Dollar under threat: Putin, Rouhani and Erdogan accept fight (Our analysis)



A few months ago, the world watched with trepidation at the attempts of the US President Donald Trump to subjugate the entire world economy to his will with the help of the all-mighty dollar. Many experts at the time predicted Trump’s imminent victory, who believed, like his followers, that there could be no substitute for the dollar adopted as the global currency. And the timid objections of a number of Chinese, Russian and even Iranian experts were somehow not taken into account: people had so great a belief in the indispensability of the dollar and its omnipotence. They ask, what will be laid at the basis of calculations in world trade, which is the driving force of the global economy.

And indeed, at first, the dollar began to overpower all the world's leading currencies: euro, yuan, rouble, lira and others. But over time, some currencies coped with this danger and stabilised at a certain rate against the dollar. In other countries, Trump's dollar pressure caused a stronger shock, but gradually they straightened their exchange rate. And today, analysing the state of the world currency market, we can confidently say that Trump’s policy using the dollar to subjugate all disobedient countries is not justified. In any case, the countries against which this policy was directed, managed to stop the sharp collapse of their own national currencies, and some currencies even show a tendency to strengthen this course. To see this, it suffices to dwell on the example of our closest neighbours: Russia, Turkey and Iran.

So, the process of dollar pressure, which was delayed for Russia, seems to be so boring for it that according to media reports, the Kremlin is now officially refusing the dollar. True, this does not mean a complete rejection of the dollar, the government will not prohibit settlements in US currency; first of all, opportunities will be created for settlements in national currency, currency control will be facilitated and currency legislation will be liberalised. The project intends to transfer the settlements of Russia with China and the European Union into yuan and euro, respectively, and in the case of the countries of the Eurasian Economic Union (EAEU) into roubles. Trump couldn’t deliver the expected effect of a blow on oil prices with his dollar: oil futures are growing despite the strengthening of the dollar and the growth of shale oil production in the United States. True, this is another side of the Tramp medal aimed at destroying the economy of Russia and Iran.

After rial's sharp collapse from the beginning of this year, the Iranian national currency unexpectedly began to grow just as sharply. Recently, within just a day, the quotes of the local currency rose by 20% at once. The cost of one dollar fell to 150 thousand riyals, while the day before the exchange rate of the American currency in the free market exceeded 180 thousand rials. In general, drastic changes in the exchange rate of the Iranian currency are not out of the ordinary. Suffice to say that at the end of May the rial exchange rate was 65 thousand per dollar, and a week ago this indicator reached 190 thousand per dollar, a record in the history of the country. And if the reason for the devaluation of the rial is clear: the threat of sanctions from the United States, then a sharp rise in the currency is somewhat surprising. Perhaps this was a reaction to reports that Iran is finalising a mechanism to circumvent sanctions.

And then there was information that Iran is completing the development of a mechanism that will allow to bypass SWIFT in trade with Europe. Moreover, an independent alternative to the SWIFT system, previously proposed by the EU to protect European firms operating in Iran against US sanctions, will be available to third countries. Thus, Trump, who decided to bring Tehran to its knees, failed to achieve his goal. The Iranian side has not only prepared a mechanism that will allow oil trading bypassing US sanctions, but also can bypass SWIFT and the US monopoly in remittances in dollars. Yes, Trump's ambitions clearly played against the US.

If earlier the transition to another money transfer system was talked about mainly in Russia and China, today Germany is also proposing that the European Union abandon the international system for exchanging banking information SWIFT. It should be replaced by a European counterpart. Creating such a system is easy. All this in no small measure contributed to the fact that Tehran ruled out the possibility of any negotiations with the Trump administration because of its withdrawal from a nuclear deal: Washington should return to this deal, and only after that negotiations can be.

Not less interest is the behaviour of the Turkish lira, which also began to recover after the collapse. The Turkish economy shows the first signs of levelling after many months of overheating, which instantly affected the lira: the Turkish national currency strengthened to its highest level since mid-August. American constraints hit the lira hard, and exporters have since been trying to adjust to volatility. But a radical reversal, recorded in trade statistics in September, indicates that exports will continue to grow, while imports will steadily decline due to weak domestic demand.

After the country's Central Bank sharply raised the interest rate last month, trying to support the national currency in this way, investors are now waiting for the completion of a diplomatic quarrel between Ankara and Washington, which could further reduce the pressure on the lyre. And if on Monday the lira, which has been testing the level of 6 lira for the last few sessions, has soared by 2.5% or to 5.9088 per dollar, then this may not be enough for full stabilisation.

Yes, unlike Iran, in Turkey many experts believe that the 'missing element' for a decisive breakthrough is the improvement of Turkish-American relations. The meeting last week of President Erdogan with German Chancellor Angela Merkel also seems not accidental, which indicates his desire to improve relations with the European Union. Now investors are hoping that the American pastor, who was detained in Turkey and because of whom the US imposed trade sanctions against Ankara in August, will be released at the hearing on October 12.

American constraints hit the lira hard, and exporters have since been trying to adjust to volatility. And this concerns not only the value of the national currency. It is enough to note that, according to the Statistical Office of Turkey, inflation in the country is also expressed in double digits unusual for its economy. So, last month, prices in the country grew by 6.3%, and over the last year as a whole by 24.52%. PMI in September fell to 42.7 from 46.4 in August, which is the lowest figure since March 2009. At the same time, exports last month increased by 22.6% compared with last year, while imports decreased by 18.1%. As a result, the country's trade deficit fell from 8.2 billion to 1.9 billion dollars. And this is a good sign of economic recovery.

So, the dollar has strengthened by more than 8% since the beginning of the year, which has not been observed for more than a decade, and market indicators point to its further strengthening in the coming months. At first glance it may seem that this proves the trueness of Trump, who promised 'To make America great again.' And the strengthening of the dollar can be considered proof that his policy of stimulating economic growth really works. But the situation is much more complicated, Trump, perhaps, brings closer a powerful dollar recession. Yes, a strong dollar is not very conducive to achieving his political goals, and the exchange rate is not always an accurate measure of the true strength of the currency. Many economists explain the strengthening of the dollar by raising interest rates. Trying to cool inflation, the Fed has twice raised the federal discount rate this year and signalled that by the end of 2018 there will be two more increases. And when the interest rate grows, more investment capital begins to flow into the country, which leads to an increase in demand for the dollar. So now money is pouring into the US from all over the world.

At the same time, the strengthening of the dollar reduces exports abroad and reduces imports within the country, which contradicts Trump’s stated goal of reducing the size of the US trade deficit. And, trying to solve the problem of the trade deficit, he introduces duties on imports of steel, aluminium and a wide range of goods from China and other countries. But rising import prices increase the pressure on inflation in the country, which could force the Fed to start raising interest rates even faster. And this can already lead to a further strengthening of the dollar and a further increase in the trade deficit.

And, most importantly, short-term movements in foreign exchange markets do not allow us to judge the fundamental strength of a currency, where long-term trends in its practice of using it internationally are more important. Today, no currency is used as widely as the dollar, and the US can spend as much as it needs to demonstrate its power in the world. To pay for all this, you only need to start the printing press. But it was Trump’s belligerent decisions that put the dollar at risk. And the longer this policy continues, the higher the likelihood that markets will gradually shift to alternatives. Thus, the dollar will slowly lose its strength, and America's exorbitant privilege, along with its global influence, will evaporate. And despite the current strengthening, in the long term, experts do not exclude the devaluation of the dollar.

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