However, the Federal Reserve rapidly intervened in order to offset the dangerous combination of dollar shortages and heightened demand. Newly-instated policies like the reestablishment of swap lines (which keep U.S. dollars flowing across foreign financial channels) and the slashing of interest rates suggest that the dollar’s resurgence in value is a short-term trend [2].
These policies are specifically designed to overrun the sudden demand for the dollar, and experts like Mark McCormick of TD securities claim that “We’ll see a market top…in the next couple of months as the Fed story overrides the dollar” [2].
In fact, swap rates for the dollar have already fallen precipitously, as European borrowers accumulate U.S. currency at a discount [3]. What does this all mean for the United States’ financial quarrels with China?
Several factors leave China poised to someday usurp the U.S. dollar’s stranglehold on the international economy, especially as our currency’s rise in value peters off.
Above all, China remains a strong and reliable debtor. It’s bonds have return rates that are comparatively better than those of the United States, and it has shown resilience in the face of global downturns (see: the drop in emerging-market bonds in Q1) [1]. In the future, China will be able to leverage its technological dominance to uphold the yuan. Powerhouses like Tencent and Ant Financial are planning on investing across Asia, propagating the yuan along the way [1].
With this in mind, the U.S. dollar’s current ascent is a backdrop in the face of a much larger struggle- one that China has a chance at tilting in its favor.
[1] : https://www.economist.com/finance-and-economics/2020/04/16/the-dollars-dominance-masks-chinas-rise-in-finance
[2] : https://business.financialpost.com/news/economy/why-the-u-s-dollars-record-breaking-surge-will-reverse-by-the-end-of-this-year
[3] : https://www.nasdaq.com/articles/dollar-borrowing-costs-drop-to-lowest-in-decade-in-fx-swap-markets-2020-04-06
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