Trust is a fickle thing. It’s there until it isn’t. This is especially true with paper currencies. Their value is based on trust that the sovereign issuer will act faithfully and responsibly. The standards for a reserve currency are even higher given their status in global trade and finance. Throughout history, there have been many reserve currencies and they have all failed, eventually. Every one.

The average shelf life of a reserve currency is approximately 100 years. Can anyone today recall the importance of the French Livre or the Dutch Guider in world trade? They were the “U.S. dollar” of their day. At their height, no one questioned their durability much the same as, until recently, most didn’t question the durability of the U.S. dollar. But for a few keen observers, the writing has been on the wall for several decades.

It first caught my attention in the late 1990s. I started to see a change in behaviour by the Federal Reserve under Alan Greenspan. He was coming to the rescue of markets under the guise of protecting the financial system with increasing frequency. First it was the bail out caused by the demise of the hedge fund Long Term Capital Management in 1998. During this same period, Greenspan — with the assistance of the media — helped fuel the dot com bubble which finally burst in 2000. By the time the 9/11 terrorist attacks occurred in September 2001, the Fed, under Greenspan, began its policy of keeping interest rates “accommodative“ permanently and also showing blatant disregard of its independence from federal government policy.   Full Article

Stephen Roach, Yale University senior fellow and former Morgan Stanley Asia chairman, has a warning for U.S. dollar bulls. The prominent economist says that the era of the U.S. buck may be coming to an end and is forecasting a 35% decline soon in the U.S. currency against its major rivals, citing increases in the nation’s deficit and dwindling savings.

The lecturer said during CNBC’s “Trading Nation” on Monday that the rise of China and the decoupling of the U.S. from its trade partners is setting the stage for a dramatic weakening of the U.S. currency in the next few years that is likely to end the supremacy of the monetary unit as the world’s reserve currency.

After markets tried to put on a show of stability late Friday, confidence has crumpled to start the week as the narrative points to a second guessing the V-shaped recovery in asset markets and concerns that Covid19 remains hard to tame. Jumpy price action since Friday make this a tactically difficult market to assess and trade.

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The nearly three-month rally in risk assets ended with high drama with a stomach-churning almost 6% slide in the S&P 500 yesterday. Follow-through selling was seen in the Asia-Pacific region, but most markets recovered from their lows, and although losses were still recorded, the downside momentum seemed broken. The same holds true for Europe. Bourses opened lower but by mid-morning had moved higher (~1.4%), and US shares are trading firmer (~2%). The MSCI Asia Pacific Index snapped a two-week advance that saw it rise 9.5% and is off around 3% this week. The Dow Jones Stoxx 600 rose around 13.75% over the past two weeks, and even with today’s gains that snap a four-day slide, it is off about 5.3% this week.

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