In Part III of MacroVoices’s conversation about the twilight of the dollar’s dominance over the global financial system, Jeff Snider elaborates on a theory we initially referenced in our writeup on Pt. II: The notion that, as the supply of dollars to certain economies contracts, the greenback could see its relative value climb, even as it cedes its dominance over the financial system to the Chinese yuan, or a consortium of rival currencies.
Snider describes this phenomenon as a short squeeze: Because so many central banks predicate their monetary policy on the dollar, and because so many foreign governments and corporations need dollars to finance trade and pay down debts, the global economy is effectively net short dollars.
So, when the Federal Reserve stops the money presses and the supply of greenbacks becomes less pliable, certain parts of the financial system – Snider points to BRICS countries like Brazil and Russia as examples – will begin finding it increasingly expensive to roll over their funding, pushing the greenback higher, as Snider explains.
Yeah, I think a better terminology would be short squeeze. It’s sort of a dollar short squeeze. And, again, if we think about the Eurodollar development from things all the way back as – some things like banker’s acceptances – it’s essentially a short dollar system, where every participant in it is short the dollar.
They roll over funding every day, whether it be in repo or unsecured or in FX – or however it’s done – essentially everybody around the world needs dollars and therefore they’re short of them. So when the dollar supply becomes less malleable, less pliable, less dynamic, it becomes a problem for certain parts of the system being able to roll over their commitments.
And what happens when you have to roll over your commitment and it’s not as easy to do so, the price of it goes up. And, in terms of currencies, a short squeeze in the dollar means a rising dollar or a falling counterpart currency.
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