A new $250 bill has been proposed to celebrate America's upcoming semi-quincentennial, and Donald Trump has a plan to put his face on it. This might be easy to dismiss as yet another example of his overblown ego. But that would be a mistake. If Trump goes ahead, it could undermine faith in what remains the world's reserve currency at the worst possible time.

Trump's allies in Congress have already introduced a law that allows for an exception to the existing rules that no living president can appear on American banknotes. Designs have apparently already been commissioned from the Bureau of Engraving and Printing, which designs dollar bills. There are still plenty of obstacles in the way. The legislation still has to be passed for one, which is never easy, even with a Republican majority in Congress. But even if it doesn't happen, or is delayed beyond the main celebrations, Trump has already decided to become the first living president to add his signature to the notes. What used to be American money is steadily being turned into Trump money.

Trump's $250 bill could undermine the dollar's credibility

That may seem harmless enough. Trump loves the limelight, and what's a few pictures on the banknotes? In Britain, we have always been happy to have the monarch on notes and coins, and the same is true in many other countries. It is not as if we use cash as much anymore, and it is hard to imagine many people will be using the $250 note regularly. But in reality, this is a symptom of something far more serious – a warning sign about the underlying strength of the dollar.

There is a reason central banks have always put weighty historical motifs on their notes. The British have the likes of Winston Churchill and the Duke of Wellington. The European Central Bank has never managed to agree on any real people or buildings – since one member or another would end up taking offence – but has done the best it can with synthesised images of historic building styles. The Bank of Japan has a selection of famous scientists from the country's history. All over the world, central banks choose an image everyone can feel proud of.

There is a logic to that. Paper money is basically a conjuring trick. It is only worth something because we all accept it is worth something, and we are willing to exchange it for goods and services. Reaching into a nation's past is one way of establishing its credibility. It gives paper money an air of tradition and solidity. Without that, there is a real risk people might start thinking it is just a few brightly coloured pieces of paper.

King Dollar is under attack

This is the worst possible time to start taking risks with the US currency. The challenges to the dollar have been growing stronger all the time. The US budget deficits are out of control, running at 6% of GDP even when the economy is doing well, and eventually the rest of the world will get tired of financing those. Central banks globally now hold more of their reserves in gold than they do in dollars, and while that is partly because the price of the precious metal has risen so much over the last year, it is also an illustration of how they are diversifying away from the dollar. China has already launched a digital yuan and is starting to promote it as a serious alternative for settling payments for cross-border trade. The cryptocurrencies led by Bitcoin have had a rough year, but there is little sign they are going away and with every year that passes, they become more established within the financial system, and were always designed as an alternative to the dollar.

The list goes on. On their own, none of those factors might be enough to knock the dollar from its throne as the world's most important currency. But when they all come together at the same time, the greenback is clearly at risk. Like a Latin American strongman, Trump is intent on personalising the government of the US and boosting his own reputation. But if he goes ahead, this may well turn into the moment when the world decides the dollar was not the rock-solid reserve currency any longer and decides to switch to something new. If that happens, the results won't be pretty for the US economy, and Trump may well come to regret his vanity project.

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Technological improvements have unrecognisably changed much of the global economy in the last 30 years. But one area that remained steadfastly stuck in the past is one of the most fundamental parts of any economy – money. In recent years, however, a financial revolution began. Cryptocurrencies have been with us now for 16 years, but they bring with them a whole host of complexities that only the faithful are willing to overlook. In most cryptocurrencies acolytes lies the spirit of the rebel – somebody who wishes to sit outside the system with their wealth independent of oversight and away from traditional assets. Inevitably, this has roused suspicion that the main benefit of cryptocurrencies is as a cover for nefarious activities.

A different type of cryptocurrency has recently come to light – stablecoins. Where Bitcoin and similar digital currencies aim at tearing down the financial order, stablecoins’ purpose is to improve it. These digital assets, backed by real-world currency, are beginning to act as an important bridge between the traditional financial system and the burgeoning world of decentralised finance. At the forefront of this movement is Circle (NYSE: CRCL), a US-listed financial technology (fintech) business that is positioning itself to be a central player in this new global landscape.

What are cryptocurrencies?

Cryptocurrencies are essentially strings of data that represent value. The key characteristic is that they are fungible, meaning that any one unit is interchangeable with any other, just as a pound coin is equal in value and function to any other pound coin. The magic that makes these digital assets secure lies in the blockchain, a development that became possible with the internet.

A blockchain is a decentralised digital ledger, a record of all transactions, that is maintained across a vast network of computers rather than being held by a single central authority, such as a bank. To understand its power, consider the traditional system of double-entry book-keeping. When you send money to someone, both you and the recipient keep a record of the transaction. A bank acts as a trusted, private third party to ensure that both records match.

The blockchain introduces a different third party outside of the private banking system. The radical idea was that the confirming party in transactions was to be a public record, open to be seen and verified by anyone. Every transaction is recorded in a “block” of data and, once that block is verified by the network, it is added to a permanent, immutable chain of previous blocks – thus creating a blockchain. This open, unchangeable record is what makes the assets on a blockchain truly unique and resistant to fraud, as it removes the need for a single, central authority. Imagine a contract between two parties. Then imagine that this contract only becomes valid once the whole world can see it and it thus only becomes legal if everyone agrees. That is the essence of the blockchain.

The difference is that a contract is a unique, non-fungible asset. Because cryptocurrencies are fungible, they can be used to facilitate secure, peer-to-peer transactions without a middleman such as a bank. That is the fundamental idea behind the original cryptocurrencies such as Bitcoin.

The rise of stablecoins

The older digital currencies grabbed headlines due to their volatile price swings and the vast wealth they created for the mavericks who saw the potential early. Stablecoins may prove a more practical innovation. As the name suggests, they are digital assets specifically designed to maintain a stable value, and their value is typically pegged to a fiat currency such as the US dollar or the euro. There are different types of stablecoins, each with a different mechanism for maintaining their peg.

The most common and trusted type is the fiat-backed stablecoin, such as Circle’s USDC. The mechanism is simple: for every digital token created, an equivalent amount of a real-world asset is held in a reserve account. This backing provides trust and stability, ensuring the stablecoin can always be redeemed for its real-world dollar equivalent. Crypto-collateralised stablecoins, such as MakerDAO’s DAI, are backed by volatile cryptocurrencies and use extra collateral to manage risk. Algorithmic stablecoins, such as the failed TerraUSD, rely on complex programs to maintain their value, but can collapse. The recent public failures of algorithmic coins have highlighted the importance of transparent, asset-backed models such as Circle’s.

Circle, formerly Circle Internet Financial, is a prominent US-listed fintech business that has made this model its core mission. Its flagship product is the USD Coin (USDC), but it has since expanded to include the EUR Coin (EURC). The company was founded in 2013 and initially focused on Bitcoin payments before making a strategic pivot to stablecoins. Circle’s history is defined by its commitment to working within the existing financial and regulatory system. From its early days, it actively pursued regulatory approval around the world. It secured key licences in New York, the UK and Singapore.

This dedication to compliance has set it apart. By actively seeking regulatory clarity from the outset, Circle has positioned itself as a trusted partner for financial institutions and businesses. Unlike many of its competitors, rather than trying to replace the financial world order, it is trying to fix it. This is in stark contrast to its main rival, Tether and its USDT coin. Historically, Tether has operated with less transparency and a more decentralised approach, often drawing intense regulatory scrutiny. Tether remains the larger stablecoin by value of currency in circulation, but Circle’s strong focus on trust and following the rules has helped it grow quickly. Because of this, many large investors and businesses see it as a safe and reliable way to enter the world of digital assets.

Circle's new financial infrastructure

Beyond simply providing a digital dollar or euro, Circle is building a new financial infrastructure. This is where the concepts of the off- and on-ramp become critical. The on-ramp is the process of converting traditional currency into a digital one, such as moving dollars from your bank account to a crypto exchange to buy USDC. The off-ramp is the reverse. Currently, these two steps can be a barrier, often involving fees and delays. But the true power of a stablecoin system could lie in a frictionless future where on-ramping and off-ramping are less frequent. Once an individual or business holds their currency in a stablecoin such as USDC, they can transfer it to anyone else in the system instantly, at nearly no cost, and at any time of day. This “always-on” payment rail will bypass the traditional banking system and its associated fees.

This is already happening – in international remittances, for example, where a USDC transfer can take seconds and cost fractions of a penny. This stands in contrast to the traditional system, which can cost upwards of £20 and take several days. In a world of mass adoption, one could even receive a salary in stablecoins, then use them to pay for groceries or bills, all within the same digital system, unlocking a cheap, frictionless, financial life. Circle has actively pursued partnerships with major financial players such as Visa and Fiserv to turn this vision into a reality. These collaborations will allow traditional finance firms to integrate Circle’s technology, helping to bridge the gap and accelerate the adoption of USDC.

Most of Circle’s income comes from the interest it earns on the money that backs its stablecoins. Each USDC and EURC is supported by cash and short-term government bonds, which together provide a steady source of earnings. How much Circle makes depends mainly on two things: current interest rates and how many of its stablecoins are in use. It’s an attractive model, but not without its risks. In a high-interest-rate environment, the firm’s profitability soars. In a rate-cutting world, however, Circle’s revenue from this source would be directly affected.

Acknowledging this dependency, Circle is diversifying its income by offering a suite of software services and customisable interfaces that help businesses integrate stablecoins into their own operations. This includes its Circle Payments Network (CPN), which provides a transaction-based revenue stream that is less sensitive to interest-rate fluctuations. At present, these are small parts of Circle’s business, but they have the potential to become more important as the firm grows.

What the future holds with Circle

Circle’s strategy of working with regulators positions it to be centrally important to an emerging global financial framework. This is no longer a theoretical possibility, especially given the recent passage of the Guiding and Establishing National Innovation for US Stablecoins, or GENIUS, Act. This new US law is the first to set clear national rules for stablecoins. It says that only approved companies can issue them and that they must follow strict rules to protect users and remain transparent. Every stablecoin must be backed one-for-one with safe assets such as cash or short-term US government bonds. Circle has followed this approach from the start and proves it through public reports. The GENIUS Act is a big deal for a company like Circle. Many other stablecoin makers will find it hard to follow these strict new rules, but Circle’s business model was already set up to meet them. This new law provides the clear rules that banks, tech companies and large businesses need. They can now use stablecoins with confidence because the law removes the legal doubts that stopped widespread use before. Additionally, the Act bans stablecoins that don’t follow the rules and sets clear guidelines for foreign companies. This will probably make Circle’s USDC even stronger as a trusted, regulated choice in the market. It punishes companies that don’t meet this new “gold standard”.

By building a trusted, compliant infrastructure, Circle is not simply creating a new cryptocurrency. It is also helping to lay the groundwork for a stablecoin-powered financial system that could one day become the backbone of global commerce. In the process, it has the potential to make the company enormously profitable. The traditional banking world is on notice: the future of finance is here, and it is built on a foundation of stable, digital money.

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After World War II, America and its allies put in place a set of alliances, institutions and power structures to rebuild war-ravaged countries, create geopolitical stability and generate global economic growth. This post-war order has endured – with one important change – for much of the following eight decades.

The fall of the Berlin Wall and the dissolution of the Soviet Union seemingly marked the end of any alternative to Western capitalism and liberal democracy as the main global economic system. However, in recent years, it has become increasingly obvious that the ties holding this US-dominated system together are fraying and are likely to break.

We are heading into a new world that is likely to be more unstable. In a symbol of this change, on 5 September this year, US president Donald Trump signed an executive order renaming the Department of Defence as the Department of War. This restores the name that it carried from 1789 until 1947 and points to the rising risks of conflict in the years ahead.

So how should investors position themselves for what comes next? What areas that are currently under-represented in most portfolios should they consider for diversification and protection?

Rivalry and conflict between the US and China

The main question is how the shift from a single superpower to two contending nations – the US and China – will affect global supply, demand and the efficiencies of comparative advantage. Free trade has generated huge gains since the end of the Second World War, and even more so since the end of the Cold War. This is now clearly under threat.

With the end of the post-war order comes the new “Great Game”. This name was originally given to the struggle between Britain and Russia for influence in Central Asia (Afghanistan and Persia). This time, the strategic rivalry and political conflict is between the US and China. Paradoxically, it is America that is now pursuing a more inward-looking strategy under Trump’s Make America Great Again (MAGA) banner, while China aims to build economic and political alliances through its Belt and Road (BRI) and Global Development Initiative (GDI) projects.

While America strives to bring its manufacturing base back onshore, Europe is now having to divert budgets from social welfare to rearmament. Both are now in stiff competition with China to electrify the planet and build digital infrastructures. This will inevitably lead to global competition for resources across energy, metals and critical minerals.

This is leading the two superpowers to weaponise their core strategic advantages. For America, this is the US dollar, still the world’s global reserve currency. For China, it is a stranglehold on rare earth elements and critical minerals.

China needs an alternative to the dollar

Freezing and confiscation of assets and denial of access to global payments systems is forcing non-US aligned countries to look for an alternative store of wealth and means of exchange. Herein lies the potential significance of the Brics+, the informal name for the original group of five key emerging-market powers – Brazil, Russia, India, China, South Africa – plus other countries that have begun joining them for summits and policy coordination. Some see this group as a counterpart to the G7 group of developed economies. Initiatives by the Brics+ members so far include work on a development bank, central-bank cooperation and an international payment messaging system.

Any alternative to the dollar looks increasingly likely to be a form of tokenised, asset-backed digital currency. This explains why many central banks closely aligned with the Brics+ nations have been large buyers of gold and other precious metals.

If the creation of a new currency system seems far-fetched, it is worth a quick review of the genesis of the post-war order: the Bretton Woods Agreement of 1944. China is a great student of history, and this agreement provides an template for how new world orders are created. While World War II was still raging, more than 700 delegates from 44 countries met at Bretton Woods in New Hampshire in the US to work on a new global monetary system. The goal was to create a globally efficient foreign exchange market, prevent competitive currency devaluations and promote global economic growth.

John Maynard Keynes, one of the principal economists at the meeting, proposed creating a new international reserve currency called the “bancor” and setting up a global central bank called the “Clearing Union”. However, these proposals were eventually watered down by the US Treasury in favour of a more prominent role for the US dollar, whereby the dollar would be pegged to the price of gold, and other participating currencies would be pegged to the dollar. The agreement was fully implemented in 1958, pegging the US dollar to gold at $35 per ounce.

This system functioned until the early 1970s when it became evident that US gold reserves were not adequate to sustain the peg. This caused a run on gold, forcing first a temporary suspension of the dollar’s convertibility into gold followed by complete collapse of the agreement in 1973. US president Richard Nixon also imposed a 10% tariff on all dutiable imports to force its major trading partners to adjust their currencies upwards and trade barriers downwards. Does this sound familiar?

China has already taken the strategic initiative to convene the Brics+ group of nations. It has established the Shanghai Gold Exchange – and associated physical storage – and now holds a significant percentage of its reserves in gold. It has shown little desire to replace the dollar with its own currency – internalisation of the renminbi would erode the ability to operate capital controls – but it and its allies need an alternative to the dollar.

Given China’s embrace of technology and advanced domestic digital-currency adoption, it does not feel far-fetched to envisage it launching a Bretton Woods-style gold-backed digital currency for those unable or unwilling to access the US dollar system. Crypto tokenisation is the vehicle, not the asset.

China's control of strategic resources

China’s strongest bargaining chip lies in its control of rare-earth elements (which are used in magnets, electrification, lasers and optical devices, catalysts and emission controls and radar/guidance systems), as well as critical minerals, that have broader energy, industrial and defence applications.

China has this control because, while the West focused on the comparative advantage of outsourcing its production to countries with lowest costs, China focused on building an end-to-end supply chain comprised of exploration, mining, refining and industrial manufacturing. With its looser environmental controls, it has come to dominate the global supply of these critical minerals.

In the tit-for-tat game of tariffs and sanctions, China is able to leverage its position in the one area where the US is completely vulnerable. So just as China and its allies have no alternative but to develop a competitor to the US dollar as a store of wealth and means of exchange, the US and Europe now see they have no choice but to develop alternative sources for mining and processing capacity to break this reliance. Exacerbating the situation, America’s prioritisation of its own MAGA agenda over historical alliances has left Europe and other previously US-aligned countries to build their own rather than collective resources.

If investors believe the post-war order is irretrievably compromised, they should consider investments that give exposure to these themes. Gold and precious metals for hard assets. Tokenisation and chips to enable digitalisation. Energy and power generation, rare earth elements and critical minerals, which will be in demand as both sides try to secure supply chains. And US and European defence stocks as the West joins in the new arms race.

Investors have many ways to access these ideas, including individual stocks, thematic exchange-traded funds (ETFs) or exchange-traded commodities (ETCs) that hold physical metals. Listed commodity futures and options are also becoming increasingly accessible, as major exchanges such as the Chicago Mercantile Exchange (CME) roll out mini and even micro contracts, which are 1/10 or 1/100 of the size of standard contracts and require less up-front capital. Such instruments are only suitable for experienced investors, but they offer a way to quickly add hedges or speculative positions to a portfolio – something that will become more valuable in a fast-changing world.

James Proudlock is managing director of OptionsDesk.

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I repeatedly come back to this subject because I think it is one of the most important yet overlooked issues in global finance. The geopolitical ramifications are enormous. Something that the Trump administration appears to understand in a way that previous administrations didn’t is this: it doesn’t matter if you issue the global reserve currency; if you don’t make anything, when the tide goes out, you are going to be caught swimming naked.

During Covid, the dangers of excessive dependence on China and its supply chains for critical or strategic products became apparent. It became clear again during the Ukraine war. Russia managed to manufacture munitions much faster than Nato.

Reshoring US industry is not something that can be done overnight. It is going to take years, if not decades – almost as long as it took to unwind in the first place. But the Trump administration is at least trying to kick-start the process with tariffs, a weaker dollar and, more subtly, the managed decline of the US dollar as global reserve currency.

As a result, neutral gold’s role as a global reserve asset is returning to prominence. History’s “golden” rule will soon apply again: he who has the gold makes the rules.

My argument is that China has considerably more than the 2,300 tonnes it says it does. That figure constitutes the world’s fifth-largest reserve of the yellow metal. The central banks of the US, Germany, Italy and France are the top four holders of gold reserves, with respective 8,133, 3,350, 2,451 and 2,437 tonnes.

How much gold does China have?

The People’s Bank of China (PBOC) is China’s main custodian, but other state entities, such as the China Investment Corporation (the sovereign wealth fund), the State Administration of Foreign Exchange and the Army, also own gold. In fact, having other state bodies hold gold is one of the means by which China is able to understate its reserves.

I’m going to use a slightly more conservative methodology, which means I will arrive at a lower estimate. Even so, the numbers will shock you. Remember that China is the world’s largest importer of gold, the largest consumer and the largest producer (in 2008 its output eclipsed South Africa’s). I am going to use round numbers, as they are more digestible, and when there is a spread (between 500 and 1,000 tonnes, say), I will take the middle number: 750.

It is impossible to know just how much gold China has imported, because so many transactions are private ones, particularly those that go through London, Switzerland or Dubai. Gold transactions in Hong Kong are more transparent.

However, most, although not all, of the gold that goes to China goes through the Shanghai Gold Exchange (SGE), which opened in 2007. Withdrawals from the SGE between 2007 and mid-2025 total 29,500-30,000 tonnes, based on aggregated data from the Shanghai Gold Exchange (SGE) and World Gold Council (WGC) reports. I’m going to overlook gold that made its way to China prior to 2007, although it’s quite easy to make the argument that this amounts to several thousand tonnes.

The SGE is just a flow metric, it should be noted. It does not represent total consumption. Some of the gold passing through will have been double-counted, either as a result of reselling and recycling, or because of China’s booming money-laundering business and the circular trade with Hong Kong. Estimates for double-counting range from 10%-30%. Let’s take the middle 20% figure (6,000 tonnes), and that leaves us with 23,250 tonnes of SGE gold.

As for the undisclosed gold, consider that the PBOC likes 400-ounce bars, as traded in London. These do not trade on the SGE, which uses smaller kilogram bars and 3kg and 12.5kg ingots. (400oz is about 11.3kg.)

So London imports will not go through the SGE, unless re-smelted, and are therefore counted in addition to the numbers above. Analysts mostly concur that while reported imports via London, Switzerland and Dubai total between 3,500 and 4,500 tonnes, another 3,000 tonnes (mostly post-2009, accelerating since 2022) have gone unreported. Add the 3,000 tonnes to the 23,250 of SGE gold and our total is now 26,250 tonnes.

Gold mining in China

Around 55% of Chinese gold production is state-owned, and we know from geological records that this century, China has mined roughly 7,500 tonnes.

Between 70% and 80% of Chinese production is sold through the Shanghai Gold Exchange, so we have already counted that. The other 20%-30% goes to the state. Using estimates from the mid-range, 25% of those 7,500 tonnes (1,875 tonnes) has gone to the state. The rest has been sold through the SGE. Add 1,875 tonnes to the total, and we reach a figure of 28,125 tonnes.

By the way, I have not included overseas Chinese gold production, of which there is a lot. Some of this gold is sold on international markets and never actually reaches China. But what does reach China is sold through the SGE and has therefore already been counted. Finally, we have to add in gold held in China, whether as bullion or jewellery, prior to 2000. The WGC estimates a figure of 2,500 tonnes in privately held jewellery. Added to domestic mining and official reserves, you get a figure of around 4,000 tonnes. This brings our grand total to 32,125 tonnes.

Demand for gold

Previously, I have argued that 50% of that gold would go to the state. That would mean roughly 16,000 tonnes – almost twice as much as the US’s reported 8,100 tonnes! Let me propose another methodology.

It stems from my conversation with Konstantin Kisin in the Triggernometry podcast a fortnight ago. Last year, investors and central banks comprised a respective 25% and 23% of overall demand for gold; the figures for jewellery and industry are 47% and 6%.

These figures of course change from year to year, with demand from investors and central banks being the big variables. But if we assume demand from China roughly matches global demand, that would mean that of the 32,125 tonnes, roughly 15,100 tonnes is jewellery; 8,030 is now bullion held by investors; 1,930 tonnes went into manufacturing; and the Chinese government has 7,400 tonnes.

This assumes Chinese gold has been allocated over the last 25 years according to the global habits of last year, which is almost certainly a bogus assumption. China is such a big manufacturer that demand from the Chinese industry may well be higher than 6%.

It’s also easy to argue that because the Chinese people like gold so much, and the state has been encouraging them to invest since 2007, that both Chinese jewellery and investment demand is higher than 47% and 25% respectively.

Similarly, because of dedollarisation, demand from the PBOC could be higher than 23%. In any case, I have been transparent about my methodology.

You can make up your own minds. The upshot is that China’s stated reserves of 2,300 tonnes are a gross underestimate.

In a way, it’s actually better for investors if China has less gold, because it means they have more buying to do, and that should help drive prices higher. Meanwhile, the Middle Kingdom’s stated 2,300 tonnes only account for 7% of its $3.4 trillion of overall reserves. To get above 70% and match the allocation ratios of the US, Germany, France and Italy, at $4,200/oz gold, it would need something like 18,000 tonnes. That’s a lot of buying yet to come, in other words.

If you take my assumption from previous years (that 50% of the gold that has gone to China via imports or production went to the state), then China has 16,000 tonnes of gold. That is twice America’s reported holdings of 8,133 tonnes.

This comes just as gold, at current prices, accounts for 30% of global foreign-exchange holdings, according to Deutsche Bank. The US dollar, meanwhile, makes up 40%. The euro’s proportion lies below 20%. This is quite the move: gold’s share was just 20% at the beginning of the year.

At $5,800 – a 33% rise from today’s price of $4,340 – gold overtakes the US dollar to become central banks’ largest holding. That assumes banks don’t buy any more, of course, when they will. A recent survey by the WGC found that 43% of central banks plan to increase their holdings over the next year, while 95% of reserve managers expected global central-bank holdings to rise over the next 12 months.

I was looking for parity between the dollar and gold in terms of reserve holdings at some stage in the next decade. We could see it within the next six months on current trajectories.

Why is China keeping its gold a secret?

And gold isn’t money, according to former Federal Reserve chairman Ben Bernanke. So why does China understate its reserves? China is still in accumulation mode. While it is buying, it wants the price low.

It certainly doesn’t want to cause it to spike.

If China were suddenly to say that it actually has 7,400 or 16,000 tonnes, rather than 2,300, it would send the gold price rocketing. More significantly, it risks sending the dollar into a plunge. China has $3.4 trillion-worth of dollars. It wants to preserve their value, presumably.

In short, coming clean on gold holdings would create enormous financial upheaval. It has that card, ready to play, should it ever need to, should it ever get into conflict with the US, for example. Money is the first thing that gets weaponised in war.

But for now it doesn’t need to. China is surely happy growing as it is, making things and selling them to the rest of the world, thus ensuring that the rest of the world becomes dependent on it. Why rock the boat? It’s on to a good thing after all.

“We must not shine too brightly,” as Deng Xiaoping is once supposed to have said. I understand that what he actually said amounted to “keep a low profile”, or “don’t draw attention to yourself”. Same difference. China doesn’t want to rock the boat, particularly while it’s still accumulating gold.

This is quite a shift that is taking place, and it is happening quickly. The upshot? You really want to own gold, overbought or not.

Dominic Frisby writes the investment newsletter The Flying Frisby (theflyingfrisby.com). His latest book is The Secret History of Gold: Myth, Money, Politics & Power, published by Penguin Business and available from all good bookshops.

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Sometimes an idea is so catchy that it doesn’t matter whether it’s true. The “debasement trade” – the claim that investors are starting to price in a severe surge in inflation that will erode the value of money – is a good example. We see it everywhere in headlines at the moment. Yet it’s impossible to see much evidence in markets. To begin with, we have to agree on what is being debased. The US dollar is the favoured target. However, if you look at the dollar versus other major currencies, there is no sign of this happening. Yes, it is down since the start of the year, and still seems more likely to fall than rise against over the next few years if foreign sentiment towards US assets continues to cool. But it has been stable since June. We’re not even seeing weakness now, let alone debasement.

Maybe the debasement is in all fiat currencies, so they won’t fall against each other because they are all equally bad. Instead, they will weaken against real assets. The surge in gold and other precious metals seems to support this. Yet stocks are also doing well, even though they typically struggle in high inflation (they often rise during hyperinflation, but that is a different scenario). More likely, traders are latching onto gold because it’s been going up: record flows into gold exchange-traded funds (ETFs) support this idea. A few months ago, I noted that we were not seeing these flows – now it has changed.

Bond yields and the debasement trade

If markets were genuinely becoming much more worried about inflation, we’d expect to see it in bond yields. While many yields have risen this year – especially longer-term government bonds – this always felt more like markets were pricing long-term uncertainty about government policy and finances, not specifically forecasting inflation. It continues to look that way.

Yields have mostly come down in the last few weeks. Even more significantly, inflation breakevens – the difference between the yields on a conventional bond and an inflation-linked one of the same maturity – are not rising (see above). Breakevens are not a good forecast of inflation, but if markets are functioning normally, they will express fear of inflation through nominal yields that rise faster than inflation-linked ones and thus through widening breakevens.

Of course, we may well see high inflation if governments run large deficits while forcing central banks to cut rates and control yields. But it’s wrong to claim the market’s watchdogs are sounding the alarm. They are clearly not – yet.

What to do if inflation surges will be on the agenda at Turmoil, Tariffs and Trump 2.0, the MoneyWeek Wealth Summit, on Friday, 7 November in London. Our morning keynote speaker, Dylan Grice, will discuss the difficulties of investing in this “high-signal” environment, while our multi-asset panel of Charlie Morris (ByteTree), Charlotte Yonge (Troy), Frank Ducomble (RIT) and Jasmine Yeo (Ruffer) will share ideas on how to hedge the risks. See moneyweekwealthsummit.co.uk for details.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

While the US dollar was continually getting stronger and sterling was continually getting weaker, British investors rarely needed to worry too much about currency movements. If you held an international fund that was benchmarked to the MSCI World or a similar index, your currency exposure was around 60%-70% to the US dollar and the trend worked in your favour.

If the era of the strong dollar is over – and the Trump administration’s policies imply that it probably is – that will no longer work in our favour.

Even if the US stockmarket keeps going up – which is quite possible if the US Federal Reserve cuts rates aggressively – a weaker dollar would mean much lower gains for foreign investors.

One obvious conclusion is that investors will give much more thought to whether they should hedge currency exposure – eg, by buying currency hedged classes of exchange traded funds (ETFs).

For example, an ETF such as iShares Core S&P 500 is available both as a share class that is quoted in sterling (LSE: CSP1) and one that is hedged into sterling (LSE: GSPX). The first will be affected by how the dollar moves against sterling. The latter will be hedged against it to some extent – but there will be a limit to this as well.

How currency hedged funds work

To understand why even a currency hedged fund won’t insulate us from currency movements completely over the long term, it’s useful to think about how funds hedge currency exposure.

Hedging means using forward contracts to lock in the exchange rate at which the investor will buy or sell a certain amount of the currency on a future date.

Of course, the exchange rate that is locked in will not be the same as today’s exchange rate. For every currency pair such as the sterling and the dollar, there will be a forward rate for a transaction in one month, one year, five years and so on. The forward price should depend on the difference in expected interest rates over that time period. If it did not, an investor could earn risk-free profits by borrowing in one currency; investing the proceeds at a fixed interest rate in a different currency for one month; and buying a forward contract to exchange the second currency back into the first currency (and repay the money borrowed) without taking any risk of how exchange rates will change.

If you have very certain long-term cash flows – eg, from an infrastructure project – you can enter into very exact hedges. You buy forwards to perfectly match the foreign currency you expect to receive when you receive it. This is not true for most equity or bond ETFs or funds, where future returns may be uncertain and where money may flow in and out of your fund all the time. So a currency hedged fund typically enters into a series of short-term forwards, which it continually rolls over. This certainly helps smooth out currency volatility – but in a world in which interest-rate expectations and hence forward exchange rates become more volatile, it may not always work as well as investors expect.

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There are not that many people still working in investment who can remember a time when Japanese government bond (JGB) yields did not trend inexorably down. They peaked in 1990, just after the bubble began bursting, and declined through most of the following 35 years.

For the entirety of my career, shorting JGBs has been known as the “widow-maker”. No matter how low yields went, they always found a way to fall further, wiping out anybody reckless enough to bet that the bottom had been reached.

This may be why the big upward moves in longer-dated JGBs over the past year have not drawn as much attention as you would expect. Anyone who has been conditioned to expect JGB yields to be low forever will instinctively doubt that it can last. This is a brief upheaval, and they will soon head right down again.

Yet, something fundamental seems to have shifted. The 30-year JGB currently yields 2.9%, comparable to the 30-year bund at 3.1%. It had ticked up to almost 3.2% before the Bank of Japan said it would reduce the pace at which it is stepping back from quantitative easing (QE), while the Ministry of Finance indicated it would issue less ultra-long-dated debt in future.

The implications of this are significant – not just for Japan but also for global markets, because low-yielding Japanese debt has been a key funding source for many global carry trades. Borrow at low rates in one currency, invest in higher-yielding assets in another, pick up the difference in returns and hope you can unwind the trade before something – eg, typically a massive currency move – leaves you with sudden losses.

Long-dated JGBs signal uncertainty everywhere

Still, the higher yields on long-dated JGBs don’t imply that Japanese monetary policy is going to normalise any time soon. Markets are pricing in a very drawn-out adjustment – while the 30-year JGB and the 30-year bund are now in line, five-year yields are still well over a percentage point apart (0.97% vs 2.18%). This long-term distortion in global markets may gradually unwind – which is likely to be bullish for the yen over the long term – but it’s not immediate, or so the market thinks. Whether this may be too sanguine is another matter: if inflation (3.5% in May) remains high, rates should go up faster.

Instead, what long-dated bonds are signalling in Japan and elsewhere is a huge amount of uncertainty. Take the US 30-year Treasury, which now yields 4.8%. This doesn’t seem to be due to fears of runaway inflation in particular, because the 30-year inflation-linked Treasury is yielding about 2.5% (ie, the rate of inflation needed for them to return the same is just 2.3%). Rather, it simply feels increasingly reckless to lock up capital for so long. Investors worry about increased government spending, the potential for large amounts of bond issuance to fund it, politics (at the time of writing, the UK 30-year gilt had ticked up to 5.4%) and much more. They are right to be worried, and current yields still feel like very meagre compensation for those risks.

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I had coffee with an Anglo-Italian friend the other day, and he began telling me about his grandparents. They called themselves “mezzadri”, or “sharecroppers”. They worked on land belonging to somebody else. Half of what they produced, they gave to the landowner; the other half they got to keep. They went to the market and sold it. My friend’s family had been doing this for generations, never actually breaking above that status to become landowners themselves.

There are many parallels with the medieval serf, who had to work the land of his lord in exchange for his subsistence and protection. Just as the serf was the descendant of the Roman slave, the mezzadri were the descendants of the serf.

In any case, in 1966, Grandad left Italy, followed by Grandma in 1967, and they came to work in England. With trade-union laws quite protective at the time, most Italians in the UK either set up small businesses or worked for their friends’ or family’s small company, especially in the catering industry. They were paid in sterling, and largely in cash, on which they are unlikely to have paid much income tax.

While sterling was hardly a beacon of fiscal rectitude, it was far better than the Italian lira, which suffered many devaluations and became a laughing stock. The money Grandad and Grandma were paid in therefore kept its value, at least on a relative basis.

Climbing the ladder

My friend’s grandparents worked hard and saved. Then, in 1970, they went back to Italy and bought themselves an apartment. For the first time in the family’s history, they owned property. They kept working in the UK and by 1976 managed to buy some of the land on which they had previously been workers. Their social status had changed – from peasant to landowner.

It was a common progression among Italian emigrants in the 20th century. When they went back home, they had far more money than those who had stayed. They hadn’t had particularly good jobs in England, they were waiters. They were only able to do what they did for two reasons.

Firstly, the money they were paid in and saved in was much stronger than the Italian lira. Secondly, operating in the cash economy and receiving much of their income in tips (which were not taxed then), they did not have 50% of the produce of their labour confiscated, whether by landowner, lord or state. There is an important message in this story about how society works and how you should position yourself.

Not only are workers fleeced by the amount of tax they have to pay (most of which is then wasted on government incompetence or worse), but they are also fleeced because the money they are paid loses its value.

Owning property has been one of the few ways in which ordinary people have been able to protect themselves against the extraordinary currency debasement of the 20th and 21st centuries. As I constantly argue, property prices are a function of the money supply, and property is unaffordable as a result of relentless money-supply growth.

Protection in property

So much newly created money goes into property that houses have become financial assets, an effective hedge against currency debasement. As house prices have gone up, it feels as if wealth has been created, but it is just an illusion. All that has happened is that property owners have had that part of their portfolio shielded from the debasement. Storing your wealth in property proved a much better bet than keeping it in cash, be it sterling, lira, euro or dollar. In addition, your main home goes untaxed, so you don’t get fleeced that way either.

My Italian friend described his confirmation some 35 years ago. One family member gave him a gold sovereign. Another gave him 20 newly minted pound coins, which my friend still has in the original packaging. Which has kept its value? Those pound coins might have some collectors’ interest, but £20 buys you far less now than it did 30 years ago. The sovereign, meanwhile, has kept its purchasing power, as gold always does.

When you work, you expend energy. The money you are paid for your effort is, in effect, stored energy to be used at some later stage. It is essential to an honest and functioning society that the expended energy keeps its potential. But it doesn’t. What can we do? We can’t change the system. But we can change ourselves.

Consider all the work that you have done over the years. Imagine if you had converted what you were paid for it straight away from fiat into strong currency – be it gold or a house. The value of your labour would have been preserved too, instead of eroded. With the cumulative savings, you’d be able to buy things today that were previously out of your reach, just as my friend’s grandparents did.

Now imagine that for all the work you’ve done over the last ten or 15 years, you had been paid in bitcoin – or, having being paid in fiat currency, you had immediately converted the money into bitcoin. You would be extraordinarily wealthy now, so wealthy that your entire social status would have changed. Many people have done that. They converted their salary into bitcoin as soon as they were paid. Because they saved in a strong currency, they no longer need to work. They could probably buy the company they worked for. They can buy houses. There is a whole movement of people who are now doing just that. They will transform their lives.

Weak money weakens you. You will not change your life or your status if you keep your wealth in a rubbish currency. Bad money is a way of keeping people down. Many will think this is deliberate, a tool of suppression. It certainly used to be. At one stage, serfs were not allowed to handle gold or silver.

Fiat has a similar effect, deliberate or not. There are some economists who argue that it is good to have a weak currency to attract overseas investment. It might well attract investment, because people with stronger currencies can buy your and your country’s labour and assets on the cheap. Why do you think so much of the UK is now foreign-owned? A weak currency makes you and your country weak.

Switzerland has maintained the strength of its franc. Ordinary Swiss people, therefore, have a higher status than inhabitants of countries with joke money. With a weak currency, you lose status globally. Imagine being an Argentine: Argentina was once one of the richest countries in the world. Italy used to be the richest country in the world, as did Britain later on. With the serial devaluation of its lira, it became a laughing stock.

A government's duty

One of the first jobs of government should be to protect the value of the currency, because then you are protecting the value of your citizens’ labour. By defending your currency, you are defending your people. You are empowering them. But when your currency is weak, you weaken your people. The upshot? Save in strong currencies. You might live in a country with a weak currency. Not all of us can up sticks and go and live in Switzerland. But you can still convert your weak currency into a strong one, be it gold or bitcoin. Saving in strong currencies will gradually change your life. And your social status.

My Italian friend, meanwhile, a basic-rate taxpayer, found himself unable to buy a property in the UK. He took a leaf out of his grandparents’ book and emigrated, at least digitally. Three years ago he began putting everything he saved into bitcoin. He put MicroStrategy in his ISA (the stock has risen thirteenfold since I recommended it to readers in MoneyWeek two years ago). Bitcoin became his savings vehicle. Now he’s buying a house.

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The Trump administration increasingly seems convinced that the US dollar’s status as the world’s reserve currency is a burden, not the “exorbitant privilege” that it is often said to be. Key economic advisers such as Stephen Miran believe that the persistent strength of the dollar has driven the deindustrialisation of the American economy by making exports less competitive.

Economists can legitimately debate this. There could even be a smidgen of truth in it, although blaming the rest of the world conveniently ignores poor decisions willingly made by US corporations and politicians. However, treating the dollar’s unique status and strength as yet another example of America being ripped off ignores some obvious benefits.

These include higher margins and lower inflation, but even more important is the impact on markets. The role of the dollar means that Treasuries have been the global reserve asset, which will have made it cheaper for the government to fund itself. Yet there are hints that this is now going into reverse.

The end of American exceptionalism

The most common theme among investors outside the US is that American exceptionalism is over. The rest of the world has been rattled by poor governance, soaring deficits and growing fears of some new anti-foreigner measures (section 899, a provision in the new budget bill that would increase taxes on US income for foreign investors, is constantly mentioned).

It would be a huge exaggeration to say that investors are fleeing the US, but it is clear that they are reconsidering the structural overweight to American assets that most have. The consequences go beyond Treasuries, since other US assets also benefit from strong demand. For example, reserve currency status has also created a huge cost of capital advantage for US companies, argues Alec Cutler of Orbis. This will now shrink, he says – another reason, on top of high valuations and soaring capital expenditure for big tech, why US stocks will enjoy fewer advantages in future.

Disorderly change

Still, this sounds like a gradual change – a reason to be less bullish on the US, but not a source of vast upheaval. While the dollar’s share of central bank reserves has declined from 60% in the early 2000s to about 46% now, according to the European Central Bank, it is dominant in payments (almost 90% of currency trades involve it). It is impossible to imagine a rapid move away from the dollar: no other currency has the same liquidity and market depth.

Yet the unpredictability of the US government – the risk that it will destroy one of its strengths because it sees it as a weakness – means that we can’t dismiss this risk. Sometimes, disorderly change is forced on us. This may be one reason for gold’s continued strength. The trend in reserves since 2008 (see chart) points to demand for a reserve asset that no government controls. Donald Trump will probably accelerate that shift.

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“Markets are discovering the real Trump trade is ‘Sell America’,” say Saleha Mohsin and Carter Johnson on Bloomberg. Stocks soared late last year on bets that the incoming president would initiate an American golden age. It hasn’t worked out like that. The dollar has dropped 9% against other major currencies in 2025.

The US relies on international capital to finance its budget and trade deficits. As Torsten Slok of Apollo Management notes, foreigners own $19 trillion of US equities and $7 trillion of government bonds, equivalent to 20%-30% of the market. Those funds are now fleeing for more predictable climates.

Will the dollar continue to reign?

Trump served up fresh controversy last week, saying that the “termination” of Jerome Powell as Federal Reserve chair “cannot come fast enough!”. Trump is angry with Powell for not cutting interest rates, says Jeremy Warner in The Telegraph. Central banks “generally deserve whatever brickbats they get”, but it is considered “beyond the pale” for a sitting government to publicly criticise them. Central-bank independence is a “cornerstone” of modern economic policy for good reason: when politicians get their hands on rates, “they almost always abuse” the power.

Trump probably doesn’t have the legal authority to remove Powell. On Tuesday, the president retreated from his comments, saying he would just “like to see” Powell “be a little more active”. The real purpose of the rhetoric? Preparing the ground to blame the Fed should Trump’s trade war cause an economic slump later this year, says Nick Timiraos in The Wall Street Journal.

On Trump’s telling, “Powell worked to help Biden during his term” with rate cuts, but is “unwilling to provide the same support” now. This overlooks that, first, it was Trump who originally appointed Powell in 2018; second, it was Powell who provided unprecedented economic support in 2020 when Trump was in office; and third it was Powell’s Fed that raised rates steeply in 2022 and 2023 during Biden’s term. This politicisation of the Fed is doing no favours to the dollar’s credibility.

“American prestige has taken a hit”, but King Dollar’s reign looks secure, says Daniel Moss on Bloomberg. The greenback’s role in world trade has survived previous American disasters, from the 1971 “Nixon shock” to the 2008 subprime mortgage crisis. Rather than a grand reordering of the global financial system, we may just be witnessing a “healthy” currency market correction after a period where the dollar was chronically overvalued.

The dollar has been the “lynchpin” of world trade for 80 years, with 88% of all foreign-exchange transactions involving greenbacks, says The Economist. A key argument for the currency is that there are no clear alternatives. China’s yuan cannot take over so long as Beijing keeps strict capital controls in place. As for the euro, while investors regard Berlin as a safer credit risk than Washington, the market in bunds is much shallower – just a 12th the size of that for US Treasuries. King Dollar will continue to reign, but its relative role will diminish as central banks pile into alternatives, including gold.

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Twenty years ago, if you had asked the average professional investor, their description of Amazon would have been something like “it sells books online and it doesn’t make any money”. Had they been particularly sniffy about the business, they might have dismissed it as a “virtual Waterstones”.

Yet today it is one of the largest firms in the world. It has revolutionised how we think about business-to-consumer (B2C) commerce and entrepreneurialism. Over those 20 years, its value has surpassed $1 trillion in value and given investors a one hundred-fold return.

For investors to benefit from future Amazon-like opportunities requires vision and long-term thinking. In the UK, Wise (LSE: WISE) has many of the characteristics of Amazon 20 years ago, including investors who dismiss it as “just a currency transfer business”. The following will explain why Wise is unlike anything else listed in the UK and has the potential to be a hugely profitable investment for those with the patience to see it through. It could become the first British company to be worth more than $1 trillion.

The story of Wise: a simple idea born out of frustration

The story of Wise began in the late 2000s at a time when the financial world was in the grips of its worst crisis in 80 years. Two Estonian expats living in London met at a party and bonded over their shared heritage. Kristo Käärmann was working as a management consultant and Taavet Hinrikus had been the first employee at Skype.

Eventually, the chat moved to a bugbear for them both – transferring money from euros and pound sterling or vice-versa. The pair had opposite problems. One was earning in euros but had expenses in pounds, whereas the other earned in pounds but had large euro expenses thanks to an Estonian mortgage.

The problem was that when money was transferred from one currency to the other, they incurred expenses that were opaque, variable and very expensive. Furthermore, depending on the day of the week and the time of the day, money might take five days to arrive in one account after leaving the other. As a smart pair of young, tech-savvy chaps, they concocted an idea to circumvent the process of using traditional transfer markets via the banking system.

The solution was to not change one currency for another. Rather, the one who earned in euros would deposit money into the other one’s euro account and vice-versa. This was done via an agreed market rate for currency transfers done via a Skype account. Since transferring money from one account to another in the same currency was a simpler process, it was almost free rather than expensive and it was considerably quicker.

Over time, the pair saved each other thousands of pounds by avoiding the usual route to move money from one currency to another. After a few years, they realised that they could provide this service to other people in similar situations, such as expats with expenses in currencies other than the one in which they earn. At the time, they thought there were 200 million people worldwide who lived like this. In January 2011, TransferWise was founded to address this market.

Wise vs Swift: how it works

The traditional way currency transfers are completed began in 1973 after a cooperative was founded in Belgium called the Society for Worldwide Interbank Financial Telecommunication (Swift). It is owned jointly by global banks and provides a messaging network for international payments.

In 1973, it was technologically advanced and allowed a process that prior to its foundation was much more onerous and costly, but Swift itself is now outdated. It works as follows:

1. A customer instructs their bank that they would like to send currency in one currency to a different currency at a different bank. The bank charges a transfer fee, which is variable but can be relatively high, especially on small amounts of money.
2. A second, intermediary bank sends the money through the Swift network, which incurs an additional fee.
3. The exchange rate is calculated and marked up for a profit.
4. The recipient bank deposits the money in a different currency in a bank account. It then charges a recipient fee.

It is cheaper than it used to be, but this whole process can add fees of more than 6% so that in effect the recipient receives 6% less money than the sender sends. Additionally, banking is not a 24/7 operation – each bank along the way has different times when it transacts currency movements. The effect is that it regularly takes several days for money to appear in the recipient’s account.

Simplistically, Wise’s model is to have pools of money in different currencies and locations. Customers instruct Wise to deduct some money in one currency locally and add it to an account in a different country with a different currency. Just because it seems simple, it isn’t easy. Underpinning this system is a technology supported by almost 1,500 development staff. Moreover, to operate in this way has required hundreds of licences across the world. This is all so that a customer receives the same service whether they are transferring sterling into US dollars or Brazilian reals into Indian rupees.

Wise’s system removes Swift from the procedure entirely and with it, considerable time and expense. In 2024, the average cost for a customer to send money through Wise was 0.59%, meaning, for example, a fee of 59p to transfer £100. For a customer transferring through a bank, it would cost around £6. Wise also reports that 60% of transfers are completed immediately (in less than 20 seconds), more than 80% are within an hour and 95% within 24 hours. Just 5% of transactions take longer than a day. Banks take between three and five days.

How does Wise make money?

One way Wise makes money is that it charges a small fee for transferring a sum (pricing starts at 0.33%). However, this has been steadily reduced throughout the history of the company. The CEO and co-founder, Kristo, has stated that he wants currency transfers to be free. One might therefore ask if the company is giving away its service for free, how does it make any money and, more importantly, why bother investing?

Customers with Wise accounts have money deposited with the company. This money earns income for Wise. More money transferred through the company increases the amount of customers’ money held on deposit, which means more profit for Wise. As with fees for transferring money, Wise plans to give as much back to customers as possible, but it can retain enough income from this source to add meaningfully to its profitability. So the bigger Wise becomes the more it earns on customers’ deposits. In turn, it can lower the cost of transferring money between currencies. This is already 90% cheaper than traditional banks, and Wise intends to make this figure 100%.

Jeff Bezos liked to say of other companies “your margin is my opportunity”. What he meant by that was companies that were making money doing traditional activities (like selling books in large, expensively maintained bookshops) could not compete with Amazon. Amazon is built to be the most efficient way of selling to customers imaginable. It reached its position by continually cutting the price of its services to customers, which entrenched its competitive advantage to the point of being insurmountable. There are loud echoes of this strategy in the way Wise operates where it, too, is entrenching its position so thoroughly that it is becoming impossible for incumbents to compete.

Is Wise a valuable investment?

For its first ten years, the company was called TransferWise because it was Wise to use its services to Transfer money. In February 2021, the company dropped “Transfer” and became Wise. The implication is clear. Wise has the opportunity to disrupt far more than just the currency transfer market.

In the past few years, the company has added more services, such as debit cards, to its offering, so that money in a Wise account can be spent as if it were in a bank account. Just as Amazon used book sales as a springboard to disrupt consumers’ commerce, currency transfer is a springboard to much more for Wise.

Yet before the company expands into new areas, there is still massive opportunity in currency transfer. Last year, the company transacted roughly £120 billion for individuals and small businesses, while more than £11 trillion was turned over globally, thus giving the company ample growth opportunity. Wise has three divisions. Two are exciting for investors given the growth possibility, but the third could be a game-changer. The company’s largest division, Personal, serves individuals. The second division, Business, serves small business accounts like small retailers. It was launched a little later but is rapidly growing into a very large market.

Before the third division is explained, consider the following analogy of what Wise has achieved. When it comes to currency transfers, banks are like train companies. They charge you £250 to go from Manchester to London and it takes two hours (if you are lucky). Wise has invented a teleportation device whereby you arrive in London as soon as you set foot in Manchester Piccadilly train station. Moreover, it only charges you £25 for the pleasure and, to top it off, is promising that in future it will be free. How can traditional train companies (banks) compete?

Wise’s Platform represents the third part of the business. Here companies that transact very large amounts of currency can piggyback onto Wise’s infrastructure. Via a process known as white-labelling, companies that offer currency transfers to customers can transact through the Wise infrastructure but the client interface appears to be their own.

In the UK, for example, customers who transfer currency through a Monzo bank account actually do so through Wise. Wise now has 90 banks globally conducting customers’ requests for currency transfers through the Wise platform. Most notably, Standard Chartered, a major multinational bank headquartered and listed in London, recently joined the Wise platform.

The answer to the question above about how a traditional bank can compete with Wise is that they can’t. Instead, banks are increasingly circumventing the outdated Swift system and operating on Wise’s infrastructure. Back to the analogy – train companies have stopped using traditional rail tracks and are now using the teleportation device for their trains.

Wise certainly has the qualities of a business that could become very special and valuable indeed. It is growing rapidly, is already very profitable and most importantly has a visionary CEO. Rather than focusing on how much money Wise is making in 2024, which is largely irrelevant in the long run, consider that Wise is building an entirely new infrastructure for a significant part of global finance. It is hard to gauge what that is worth, but the best guess is that it’s worth a lot more than today’s share price implies. It would be very optimistic to say that Wise could be the first UK $1 trillion company but it is a realistic possibility.

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Russia’s rouble hit a two-year low against the dollar on 26 November following new US sanctions against Gazprombank, says Reuters. The bank handles the last remaining European energy transactions with Russia, so the sanctions will cut into Russian gas revenue. The rouble dropped through the 100-to-the-dollar mark for the first time in over a year. The currency lost 11% against the dollar and 7% against the euro this year.

The central bank has raised interest rates from 9.5% before the war to 21% now. Even that eye-watering level is barely containing inflation of 8.5%. High interest rates are hurting stocks, with the local MOEX index down 20% this year. Foreign investors have been frozen out of their Russian holdings since the country’s 2022 invasion of Ukraine.

What does the rouble collapse mean for Russia's economy?

“Relentless” Kremlin war spending is causing Russia’s $2 trillion economy to overheat, says Jason Corcoran in The Moscow Times. High interest rates are stressing the property sector, with “over 200 shopping malls” at risk of bankruptcy because of soaring debt costs. Butter prices are up almost 30% this year, turning a “simple staple” into “a luxury” and prompting a spate of butter thefts.

Defence and “national security” spending now accounts for 40% of the Russian federal budget, says Tim Lister for CNN. Non-defence businesses are struggling to find enough workers, driving a wage-price spiral. Still, a “steady stream of commodity revenues” and “escalating repression at home” means the Kremlin “can continue funding its war effort for the foreseeable future”, says Alexandra Prokopenko of the Carnegie Russia Eurasia Center.

The Russian economy is likely to be heading for “stagflation”, says Filip De Mott in Business Insider. But analysts at the Center for Analysis and Strategies in Europe think the Kremlin can hold off a more “serious crisis” for at least “three-to-five” more years. They argue that Moscow can bring in new immigrant workers from central Asia to stem labour shortages, while there is still scope to raise taxes on individuals and companies to buttress government spending.

A country that agrees to trade advanced military technology in exchange for North Korean soldiers is evidently running into major “resource constraints”, says Martin Sandbu in the Financial Times. Ultimately war economies must transfer resources from the private sector to the military.

High interest rates have that effect. Russia’s 21% rates are starving “long-term corporate investment”, diverting resources to immediate defence production instead. Russian industrialists are already complaining. Even Sergei Chemezov, the boss of state-controlled weapons business Rostec, has “publicly warned” that “if we continue to work like this, most companies will go bankrupt”.

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There is a growing global market for cross-border payments, in which new companies are taking business away from traditional banks and foreign exchange brokers who lack the resources to cope with increasing compliance requirements. Finseta (Aim: FIN) is a good example of one such company. It provides multi-currency accounts for businesses and high net-worth individuals (HNWIs) all over the world. The firm removes the complexity of international payments by managing currency risk, payment and electronic account services. Finseta has a market value of £22 million and achieved a turnover of £9.65 million in 2023, up fourfold from 2021.

How Finseta is leaving a worldwide footprint

Finseta does not compete in the low-value, high-volume retail market, but instead provides bespoke services to corporate and HNWI customers making high-value compliance intensive transactions. The company serves 1,400 customers in more than 150 countries and with more than 58 currencies. It offers accounts in at least 35 different currencies and provides four main advantages over traditional banks. These are: first, one-to-one personalised service; second, reduced paperwork; third, speed (witness a turnaround time of less than 24 hours) and, fourth, cost (the service is up to 5% cheaper than high-street banks’ offerings). 

Finseta was formed in 2010 and was listed on Aim in 2021. It has a low-risk business model since it does not engage in speculative currency trades nor trade from its own balance sheet. Payments are facilitated through counterparty relationships with only limited use of Finseta’s balance sheet, and this leads to low working capital intensity, a high return on capital and high cash conversion. Finseta invests in its regulatory and compliance capabilities, which are important for its customers, and its diversified business is not reliant on particular currency pairs or payment corridors. Its highly scalable technology platform facilitates future growth and innovation. 

Finseta is expanding internationally and into new markets to position itself for sustainable long-term growth. In January 2024, the firm signed a deal with Mastercard to launch a corporate card scheme. The company will now be able to launch commercial cards co-branded with and supported by Mastercard for the group’s corporate customers. The card is expected to be launched in the next few weeks and will offer customers an additional payment route, which should be particularly useful in managing business expenses flexibly.

Finseta has grown both organically and through bolt-on acquisitions. It was known as Cornerstone FS in 2021 when it was first listed on Aim. In 2022 both Capital Currencies and Pangea FX were acquired and the company’s name was changed to Finseta in April 2024. International expansion began with the opening of a new Asia office in August 2021 followed by an office in the United Arab Emirates in September 2021. Authorisation to operate in Canada was granted in April 2024. In June 2024 Finseta received £150,000 cash for selling, to a non-competing business, its non-trading subsidiary Capital Currencies.

Given this international expansion and the 2022 acquisitions, it is not surprising that revenue rose 38% from 2020 to 2021 and then more than doubled between 2021 and 2022. It then doubled again the next year to reach £9.65 million. The pre-tax loss grew from £1.4 million in 2020 to £5.6 million in 2022 as the company expanded internationally, but the doubling of sales from 2022 to 2023 enabled it to declare its first pre-tax profit of £1.3 million and first positive cash flow in 2023. In reporting the company’s 2023 results, CEO James Hickman said that the strong trading momentum of 2023 had been sustained in 2024, so the company expects continuing growth this year.

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Today we look at what must be the most important price in the world – that of the global reserve currency, the US dollar. Does it go up or down from here? There is probably no more important question in global finance. Why? The dollar is the pricing mechanism for essential materials; commodities such as oil, copper, gold and wheat. International debt is mostly traded in dollars. The International Monetary Fund thinks in dollars. The greenback determines global capital flows – whether money is flowing from or to the US. Most importantly, is money flowing, or tightening?

If the dollar is falling it usually signals boom times for assets, equities and commodities especially. The US prints and spends, and then exports the inflation. Money becomes loose and there is a party. House prices go up, equity prices go up, bond prices go up, energy and metal prices go up. Everybody feels wealthy as the US prints and spends, and then exports the inflation and debasement. But when the dollar is strong, everyone gets the jitters. Money tightens. 

Today the US dollar is seriously oversold. The inverse trade, gold, is at all-time highs. US equity markets are flirting with record peaks, while the euro and the yen, even the pound, have been soaring. What’s more, the US elections are coming.

Fluctuating value of the US dollar over the years

Since 1985, almost like clockwork, the dollar has declined under the Republicans – Reagan, Bush (twice) and Trump – and rallied under the Democrat presidents Clinton, Obama and Biden. Who wins in November has a big impact on the price. Do you want to know who is going to win? Look at what the dollar is doing now. But there are several months to go until November, and much can change in just a few weeks. 

The US dollar index tracks the dollar against the currencies of America’s main trading partners – the euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona. The Relative Strength Index (RSI, a measure of momentum designed to determine if an asset is overbought or oversold) has gone beneath 30 for the first time in more than a year. You would typically expect a reversal from these levels and, indeed, as I write this piece, the dollar does seem to be turning. 

The last time it was this oversold, July 2023, the dollar had a three-month rally that was quite something: about 8%. That’s a lot for a currency in that time frame. In fact, based on this, I have taken a small short position in cable (the pound/dollar exchange rate), betting that the dollar will rise against the pound. US Federal Reserve chairman Jerome Powell has indicated that the central bank is now ready to start cutting rates, which should be bearish for the dollar. But oversold is oversold. “The time has come for policy to adjust,” he said. “My confidence has grown that inflation is on a sustainable path back to 2%.” 

The market is somewhat divided as to whether the first cut will be 0.25 or 0.5 percentage points, but lower rates are certainly coming. The “inflation monster”, by their definition, has been tamed. “The two-year yield has fallen to 3.9% compared with base rates at 5.5%, which is the bond market’s way of pricing in future rate cuts,” says Charlie Morris at ByteTree. “The difference, at -1.6%, means a full rate-cutting cycle lies ahead. This reading is more pronounced than [that] seen in 2001 and 2008, implying the cuts could come thick and fast.” Note that 2001 and 2008 were major turning points in the US dollar. 

What about sentiment? To gauge this, I ran some polls on various WhatsApp chats and Twitter/X. WhatsApp was inconclusive (30% bull, 35% bear, 35% no strong view). Twitter/X was more telling: 50% bearish, 30% undecided, just 20% bullish. Bullish is the contrarian view. On a purchasing power parity basis, the US dollar is still expensive. (Have you been there lately?) But purchasing power parity can stay irrational a lot longer than you can stay solvent. The same goes for all value trades. 

The dollar tends to trade in long cycles. Even so, this one has been going on a very long time. From its peak in 1985, it did not make a final low until 1992, seven years on. It then retested the area in 1995. Just the bottoming process took some seven years. There then followed a period of strength from 1995, which peaked in 2001. Again, the reversal process took some three years between 2000 and 2002. This was followed by a down cycle – accompanied by that amazing bull market in commodities – that lasted six years, from 2002 until 2008. The bottoming process then took another three years. And the next bull market lasted from 2011 to late 2022.

My view, based on previous cycles, is that we are likely to be in the latter stages of a topping process. I’m not entirely sure the next bear cycle begins here. However, with plenty of gold and bitcoin, and being sterling-denominated, I am more than happy to be proved wrong. From a macro geopolitical perspective, I believe the dollar faces major challenges in the years ahead, possibly from the Chinese yuan or a gold-backed currency or petrocurrency that the likes of China, Russia and Iran may use for trade. However, we are still a few years away from that.

Dominic Frisby writes the investment newsletter The Flying Frisby: theflyingfrisby.com.

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The Japanese yen has sunk to a 34-year low, trading as low as ¥160 to the dollar on Monday. Japan’s currency has shed more than a third of its value over the past three years, says Jonathan Yerushalmy in The Guardian. The Bank of Japan (BoJ) has held interest rates “extraordinarily low”, even as they rise in other countries. It finally raised them in March – the first hike in 17 years – but only to just over 0%. 

At a meeting last week, the BoJ held rates steady, signalling that it is in no rush to hike again and precipitating “another round” of yen selling. Currency traders have finally realised “that Japan is following a policy of benign neglect for the yen”, says George Saravelos of Deutsche Bank. 

Speculation about rapid rate hikes was an illusion. While yen weakness does increase inflationary pressure, that is still not a pressing concern in Tokyo, since a weak currency has other advantages: it is helping exporters to stay competitive and driving a tourism boom. 

The yen’s new low didn’t last long, says Richard Abbey on Bloomberg. In wild trading on Monday it quickly gained 3% against the US dollar, triggering suspicions that the government had intervened to stem the bleeding. While Tokyo may not mind a steady decline, it wants to avoid a destabilising currency crash.

A weak yen helps exporters

A weak yen is good for Japan’s export-focused multinationals. The local Topix index has been one of the world’s top performers with a 15% gain this year. 

Unfortunately, the yen’s slump also eats into those gains in sterling terms, with the London-listed iShares MSCI Japan Fund up by a more modest 7% for the year to date. 

“The drip, drip, drip of weak yen news” has become “part of the Tokyo zeitgeist”, says William Pesek in Nikkei Asia. Japan’s sliding currency is discussed “on television, in newspapers” and “at bank branches”; it can also be seen in the exploding number of foreign tourists. 

The slump threatens eventually to undermine the confidence of households and foreign investors. A relentlessly weaker currency is hardly the sign of an economy roaring into recovery mode after decades of stagnation. “If Japan Inc. is primed for a boom,” then why must the country rely on an “Argentina-like currency strategy”? 

Japan’s Nikkei stock index hit a record high earlier this year, but it’s not too late to jump aboard, says Kate Marshall of Hargreaves Lansdown. “Japan’s market still looks good value compared with other global markets and its own history,” with especially appealing value among small and medium-sized firms. 

While “excitement” around corporate governance changes has cooled, the reforms have fostered a durable shift in “mindset”, with firms increasingly run in the interests of their shareholders. That should keep providing a steady tailwind for Japanese shares.

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The Roman empire is probably more famous for debasing its money than for amassing it. Here we look at the rise and fall of sound money in Ancient Rome. There are many parallels with today. The geology of central Italy is not particularly abundant in gold and silver, and it was only after Rome began expanding beyond central Italy in the third century BC that it started using the two metals. 

Commodity money tends to be determined by the resources available. Bronze (made of copper and tin) is abundant in the area, and bronze in the form of weights – known as aes rude, often as heavy as 11 ounces (300 grams) – was the early currency of choice. 

As the Republic expanded, so did access to gold and silver, either from loot, tribute or mined supply, and these precious metals made their way into Roman money. The first silver denarius was minted in 211BC. Within 50 or 60 years Roman coinage was widespread across Italy. Much of the silver to mint the coins came from mines in Macedonia, which Rome now controlled. 

For the next 500 years this silver denarius, containing an eighth of an ounce (four grams) of silver, around the weight of a 1p coin, would be the backbone currency of Rome. One denarius was exchangeable for ten asses (the aes rude evolved to become the as), hence its name “of ten”, or tenner. It was 95%-98% pure silver. Sterling silver is only 92.5% pure. 

The purchasing power of a denarius would be more than the underlying metal value. It ranged between 1.5 and three times the value. That’s seigniorage for you. The denarius lives on today, especially in many Latin languages. The Italian word for money is “denaro”, “dinero” is Spanish, “dinheiro” Portugese. In many Arab nations, the currency is the dinar.

Heads of emperors appeared on coins, and so they began to be used for imperial propaganda. The more coins circulating around the ever-growing empire, spreading the message of Roman might, the better.

From Republic to Empire

The infamous debasement only began shortly after the Republic became an empire, and control of money passed from the senate to the emperor. It lasted several hundred years. By the first century AD, taxation and tribute only covered 80% of the imperial budget. The shortfall was met by mining and the loot of newly conquered nations. But the empire was no longer expanding at the same rate, so this was becoming an increasingly risky strategy. Deficits, especially under extravagant emperors, became increasingly common. 

The solution to excessive spending, as today, was not to rein it in, but to debase the currency. In AD64 Emperor Nero reduced both the amount of silver in a denarius (to 3.5 grams) as well as the purity of the metal itself (to 93.5%). A few decades later, under Trajan, the Roman empire reached its greatest extent. From then on, it receded. That meant the supply of loot from newly conquered territories receded too. 

By lowering the amount of silver in its coins, Rome could produce more coins and “stretch” its budget. Successive emperors followed Nero’s strategy. As with boiling frogs and the debasement of currency today, the process was gradual. A century after Nero, around 150AD, the purity of silver had been reduced to 83%. By 250AD the figure was 50%. But then the debasement accelerated. By 275AD the purity was just 5%. Then the sleight of hand was exposed. By the time of Diocletian, emperor from 284 to 305AD, there was so little precious metal in the money that he had to resort to price controls. The last denarii were minted under Diocletian. 

The most important gold coin of Ancient Rome was the aureus, similar in size to the denarius, but containing roughly twice the weight of precious metal (gold is denser than silver). It would be a bit heavier than a two-pence piece today. An aureus was worth 25 denarii, so the gold-silver ratio would have been about 1:12, the historical norm. 

Nero reduced the gold content to 7.3 grams, the same weight as the sovereign of the British empire. By 210AD the gold content had fallen to 6.3 grams. However, unlike the silver denarius, the aureus kept its near-100%, 24-carat purity. By the fourth century, the idea of obtaining an aureus for 25 denarii was long gone. In 301AD, one gold aureus was worth 833 denarii. A decade later, it was worth 4,350 denarii. 

In 337, Constantine, who had relocated the heart of the empire to Constantinople, replaced the aureus with the solidus: about 4.5 grams of 24-carat gold. Initially, one solidus was worth 275,000 denarii, but by 356, it was the equivalent of 4,600,000 denarii. Talk about inflation. 

However, in a breathtaking show of hypocrisy, the Roman authorities, despite the declining quality of the metal content of their denarius, refused to accept anything other than gold and silver in taxes. 

Of course, one key reason for the relentless debasement was a bloated state incapable of living within its means. But another reason must be a lack of raw material. As central Italy had little supply, the metal had to be obtained elsewhere and most of it came in the form of war booty and the subsequent tributes and taxes levied. No wonder Rome was constantly at war. That was its business model. But the expense of continual wars, without the corresponding payback of loot from the newly conquered, made the model unsustainable. The expansion ceased, but the spending didn’t.

Dominic Frisby’s show on gold at the Edinburgh Fringe is on at Panmure House, in the room in which Adam Smith wrote The Wealth of Nations (https://tickets.edfringe.com/whats-on/dominic-frisby-gold). Dominic writes the newsletter The Flying Frisby.

 An alert just went off in my calendar. “Start looking to short the British pound”, it says. Why would one short strength? Sterling has been very strong over the past few months (mainly due to higher interest rates). 

You wouldn’t know it to listen to many financial commentators, who so often seem consumed with national self-loathing, but against a basket of major foreign currencies, the pound is actually flirting with six-year highs. It has a bit further to go against the euro and the US dollar; we tend to think of the pound-dollar rate, aka cable, as the defining measure. 

Charlie Morris of asset manager ByteTree argues that the pound has become a carry trade (whereby you borrow at a low-interest rate in one currency and invest in another currency with a higher rate of return).We appear to be in an equities bull market, and the pound, as the currency of a nation geared to finance, tends to be strong when financial assets are strong. During times of financial crisis, it is much weaker. 

Whatever the explanation for the recent strength of the pound, I set the alert some three or four years ago – before the strength kicked in. What on earth was I thinking? It’s based on a cycle I’ve identified. As far as I know, I’m the first to observe this cycle, so, with Brand Frisby in mind, I’ve named it after myself: Frisby’s Flux – the eight-year cycle in the pound. 

Before I explain the cycle, let me issue a disclaimer. As I explained last week, it’s easy to look back at the past, find some arbitrary pattern and declare it a cycle. Real life in real time is often a very different matter. Nevertheless, cycles can help frame where we are in the grand scheme of things.

Eight-year cycle in the British pound  

My observation is that every eight years, the pound seems to crash. We start in 1976, the year we needed a loan from the International Monetary Fund. At one stage, inflation reached 24%. The Labour government borrowed $3.9bn, at the time the largest loan ever requested. From high to low, sterling lost around 40%, reaching $1.60. But it recovered. By the early 1980s sterling was back above $2.40.

Then came the next bear phase, in which the pound would drop by more than 55% and reach a record low against the dollar: $1.04. This was the era of the Falklands War and then the miners’ strike. The low came shortly after 1984 became 1985. 

On the other side of the trade, the US dollar was showing extraordinary strength – so much so that France, Germany, Japan, the US and the UK eventually colluded to depreciate it. 

This was the Plaza Accord of 1985. Again sterling would recover – this time to $2. Eight years on, in 1992, sterling hit another significant low. This was Black Wednesday, when the Bank of England took the UK out of the European Exchange Rate Mechanism (ERM). It fell from $2 to $1.40 – a 30% loss. The killing that George Soros made selling the pound sealed his reputation.

Eight years later, around 2000, as the dotcom bubble collapsed, the pound lost a fifth of its value. (What did I say about the pound being geared to finance?) But again it rebounded. By 2007 it was above $2.10. Can you imagine? The pound above two dollars only 16 years ago.

Then we got the financial crisis of 2008 and, yes, the pound lost 35%, hitting a low of $1.36. The next low came in 2016 with the infamous Flash Crash, shortly after Theresa May’s speech at the Conservative Party Conference. Having been above $1.70 at one point earlier in this cycle, it hit a low of $1.14. The overall drop from high to low was 35%.

The subsequent bull market was probably the limpest in living memory. The 2016 low was retested in the Covid panic of 2020, but then we had a good rally to $1.42 by mid-2021. After that, with so much political upheaval, the pound turned down. When the Bank of England broadcast that it would be selling the UK gilts it had printed the money to buy during quantitative easing (QE), and chancellor Kwasi Kwarteng then gave us his low-tax budget, panic gripped the markets and the pound hit an intraday low of a $1.04 (the same low it hit in 1985). Since then we have had quite some rally.

 What’s next for the British pound? 

 Did the eight-year cycle low come early? Was that it in 2022, or can we expect it some time in 2024? When I first wrote about Frisby’s Flux in 2017, I suggested that we should be looking for a high some time in 2022-2023, as an opportunity to go short. That is why I got that notification in my calendar. This current rally might be providing us with just one such opportunity. The question is: how long will it go on?

On a long-term basis, the pound at $1.28 is not exactly hugely overvalued. The Economist’s Big Mac Index gauges whether currencies are overvalued or undervalued by calculating what exchange rates would be if the price of a Big Mac were the same everywhere – if purchasing power were equal everywhere, in other words. The Big Mac gauge suggests we are not far off fair value. As I say, cycles are easy to identify in the rear-view mirror. They are much harder to trade in real time. 

Perhaps the trigger will be yet more dysfunctional politics. Perhaps the Bank of England will fall even further behind the inflation curve and rates will spike, triggering some kind of crisis such as we saw in the lead up to 1992. Maybe equities more generally turn bearish. We can only guess what the trigger might be. But Frisby’s Flux, whatever it is worth, and that might be very little, is suggesting there might soon be an opportunity to go short the pound, looking for an eventual low in 2024.

I've said it before and I'll say it again - the US dollar is the most important price in the world.

The dollar is the global reserve currency, the international money of default.

Global commerce thinks in dollars.

It’s the pricing mechanism for essential materials. Commodities like oil, copper, gold and wheat, are traded in US dollars.

The majority of international debt - and there is even more debt than essential commodities - is traded in dollars. The IMF thinks in dollars.

It’s a determinant of international capital flows: is money flowing from or to the United States, the largest economy in the world (just)?

I can get all idealistic and say the world would be a better place if gold had this role. It should. It’s independent. It gives no nation or government exorbitant privilege. It lasts longer. It has a proven history. Its purchasing power doesn’t get steadily eroded. New gold supply matches population growth. That kind of stuff.

But the reality is that the US has got the gig, largely by having such a strong army, and also for the fact that so many around the world trust in America. (I would argue that trust is not what it was. It’s fading. But when push comes to shove it still has the gig).

A strong US dollar should be good for international stability, and thus good for America’s reputation. But the US government likes to print, spend, and then export the inflation and debasement. You just need to look at what it does to know what it prioritises.

The US dollar and the global economy

When the dollar is weak, asset prices rise – and the policy-making world sure does love a bit of asset-price inflation. Borrowing is cheap, house prices go up, stock prices go up, bond prices go up, energy and metal prices go up. The party keeps on rocking. Everybody feels wealthy.

But when the dollar is strong, the world gets the jitters. It starts to think that the asset price bubble that has been inflating since August 15, 1971, might be about to pop.

Those in charge may talk tough. They wear smart, plain suits and look respectable. But then they usually start printing again.

Here’s the thing though. The dollar has just hit an inflection point. It comes to them every now and then. And when it does, it pays to take heed.

Despite the experience of day traders, where prices flicker at you and fortunes are made and lost in tiny fluctuations, if you zoom out a bit, the dollar tends to trend for months at a time, if not years.

The US index (the dollar versus the currencies of its major trading partners) hit a high in 1985. It got so high, in fact, the G5 nations signed the Plaza Accord to get the price back down again. The eventual low did not come until 1992, seven years later.

This wasn’t a one-directional thing, except for the first move. There were counter-trend rallies that lasted several months.

Long-term dollar trends

In fact, the process of making a low lasted from 1988 to 1995. It made a low, rallied a bit, made another low and so on. It took time in other words.

But then from 1995, the dollar rallied - with the usual drawn-out countertrend moves - all the way to 2001. With the dot-com bust, 9-11, the Iraq War and all the rest of it, the dollar then saw seven years of a bear market and in 2008 it made another low. The price was 71. It rallied for several months, then declined for several months, eventually retesting the low in 2011.

So the bull trend, the bear trend and the process of making lows and highs can each take many years. If you, as an investor, trader or portfolio manager, were able to catch these trends - and be in and out of the market at the right time - you would have been able to magnify your returns many times.

The low in 2011 was 72. Many years of a bull market - with the usual drawn-out countertrend moves - followed before the dollar index eventually peaked in September last year at 114.

Here’s the long-term chart that illustrates what I have just described:

When it changes direction, this lumbering beast likes to put in double tops and double bottoms, more than any asset I can think of. Sometimes triple tops and bottoms. It reaches a level, then re-tests it, and then sometimes re-tests it again.

Here’s the thing. It might be putting in one such double bottom now.

The pain, especially of commodity prices, has been relieved somewhat these last few months as the US dollar has come off. This last month has felt particularly good with gold and silver both strong.

But the dollar index hit a low at 101 in early February. It rallied for a few weeks, then came off again. It’s retesting that low now.

Does the US dollar now rally?

I have to say it would be quite normal behaviour for it to do that from here.

I have heard a lot of excitement about silver, for example. You know my cynicism about that metal. Too much excitement and euphoria usually mean declines are upon us. In fact, in the last few days, I have taken a small short against silver in my spread-betting account.

I’m not forecasting the beginning or end of a major dollar cycle. But I do think, assuming 100 on the US Dollar Index holds, we might see a reversal in the dollar that could last several weeks or months.

It comes, interestingly, just as gold is re-testing its highs.

It’s all about that 100-101 level.

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Sterling touched a two-week high against the dollar today after chancellor Kwasi Kwarteng backtracked on plans to scrap the 45p income-tax rate on Monday.

The decision to axe the additional rate of income tax caused a storm in the markets, forcing the Bank of England to ride to the rescue. Sterling fell to a low of $1.0384 on 26 September just days after the mini-Budget and government bond yields surged to levels not seen in over a decade.

However, earlier today sterling briefly touched $1.14 and government bond yields have returned to levels seen before the chancellor’s so-called mini-Budget.

Why the U-turn is helping sterling

Thanim Islam, market strategist at international business payments specialist Equals Money, said sterling is higher as the chancellor’s U-turn has lowered interest rate hike expectations.

“Chancellor Kwasi Kwarteng has confirmed that the government will not be proceeding with the 45% tax rate. Sterling has risen off the back of the news, and markets have pared back interest rate hike expectations. November's expectation is now for a 1.25% with a further 1% hike in December,” Islam said.

The Bank of England’s emergency intervention to stabilise markets has also helped improve sentiment. Last week the central bank announced it will spend up to £65bn – £5bn every weekday until 14 October.

It is, it said, ready to purchase “conventional gilts with a residual maturity of more than 20 years in the secondary market, initially at a rate of up to £5bn per auction. These parameters will be kept under review in light of prevailing market conditions.”

Are these measures enough to reverse sterling’s slide?

Despite the government’s U-turn, most market watchers believe sterling will remain under pressure due to the headwinds facing the UK economy and the country’s growing debts.

"We do not see today's announcement by the UK chancellor as a game changer for sterling,” said Vasileois Gkionakis, head of Citi’s European FX strategy.

"The borrowing path trajectory will barely change and the big issues at play (unsustainability, higher risk premium) remain in place in our view,” he added.

How will a weaker pound affect you?

Weaker sterling and a higher dollar make the cost of imports more expensive and will raise prices at a time when all Britons are grappling with a cost of living crisis.

Philip Dragoumis, the owner of London-based Thera Wealth Manager, says, “If foreign investors lose confidence in the country, its government and economy, which is happening at scale, sterling could fall much further and the fallout will be devastating. This will keep inflation higher for longer and growth lower.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “The plunging pound is effectively picking our pockets and making us poorer. The market reaction to the tax and spending plans announced on Friday will have a profound impact on everything from the cost of filling up the car and supermarket prices to debt repayments and the value of our savings.

“Pound crashes to weakest level since 1985 in blow to Truss” ran the headline on the Telegraph website yesterday.

“The Bank of England had one job today”, as economist Shaun Richards put it, “which was to talk up the pound and instead their waffling sees it at US $1.14.” Theresa May Flash Crash aside, that’s a 37-year low.

And that’s measuring it against the dollar. If you measure the pound’s purchasing power against essential basics such as energy or houses, its performance has been way more woeful.

It’s not just the pound, even if it is one of the worst offenders. It’s all fiat money. I’ve been banging on about it for 20 years but I may as well bang on some more: fiat money and its devaluation is the greatest and most pernicious intergenerational theft in history.

Devaluing your currency boosts assets but devalues labour

When you devalue money, among numerous other things, you devalue salaries, which is to devalue the labour. All the young have is their labour. You boost the value of assets meanwhile, which is what the old have acquired over their lives. The net result is to transfer wealth from young to old. Compounded over decades, 5% one year, 8% another, this process has been devastating. Don’t get me started on the knock-on effects: smaller families started later in life and all the rest of it.

So many people of my generation and above think they are business geniuses because they paid the market rate for a house 30 or 40 years ago. You are not. Systematic and incremental devaluation by successive administrations was “what did it”.

The Bank of England, the Federal Reserve Bank, the European and Japanese Central Banks – they all have a lot to answer for.

It feels like we might finally be in some kind of endgame for fiat now. Mind you, I thought we were in the endgame in 2008, so I’m probably wrong this time around as well. I’ve no doubt some new magic words even more unintelligible than “quantitative easing” are being conjured up as I write.

Right rant over. I had to get that off my chest. Let us move on.

Does a new PM mean it’s time to go long the pound?

We have a new government. Money is the issuance of government. The weak pound is all over the headlines. So I thought it would be an interesting exercise today to look, first, at the performance of the pound by successive governments over the past generation. And then to consider whether one should be buyer or seller here.

“Buy on silence, sell on headlines,” is a good little investment motto that I’ve just invented. When something makes the headlines, there is often not a lot of narrative left in the tank, the story is mature and the next stage is exhaustion. It’s standard contrarian market psychology. Does the fact that the weak pound has made the headlines mean it’s time to take the other side of the trade and go long? Could be.

We’ll start with a chart of the pound against the dollar – aka cable – since 1970. And by the way, the dollar has a much larger market cap than the pound, so what is going on on the other side of the pond tends to have a greater effect on cable than what is happening here. That is the case at present. The pound is weak, but so is the euro, the yen and any other number of currencies you care to mention – except the Russian rouble. Current pound weakness is as much a function of US dollar strength as anything. The chart of the pound against the euro over the last three years is much flatter.

In any case, cable is the benchmark, so here is the pound against the dollar since 1970, when it was $2.40 (!).

The broader trend is down, but there are periods of relative strength – 1976-1981, 1985-1991, 2000-2007. We’ve basically been in a downtrend since 2007, shortly after Tony Blair stood down and Gordon Brown became PM. It is what is known in the game as a secular bear market.

Now we consider the same chart, but this time I have overlaid the government. Even though several prime ministers have led successive governments – Wilson, Thatcher, Major and Blair for example – for the sake of clarity and simplicity I have marked the chart by PM. Needless to say the dates of the red and blue lines are approximate.

The first observation I make is that, despite their reputation for fiscal competence, the Tories have not been good stewards of the currency. In the case of Edward Heath and David Cameron, the pound was marginally stronger when they stood down than it was when they took office. Despite his presiding over Black Wednesday and the ERM fiasco, for John Major the pound was only a few per cent lower than it was when he started.

But in the case of – and this surprised me – Margaret Thatcher, plus Theresa May and Boris Johson it was lower.

Labour’s record is mixed. Harold Wilson saw it lower, Jim Callaghan higher (that surprised me too). Tony Blair has the best record of all – it went from roughly $1.60 to $2.10 – and Gordon Brown the worst.

That said Blair was one of the few PMs – perhaps the only one – to stand down from a position of strength. Normally PMs are stood down because there is something voters or MPs or both are not happy with, which will be reflected in a weak currency.

Lower taxes and less spending should encourage growth

Back to today. This latest move in the dollar has been extraordinary. I’ve long been suggesting the US dollar index could go as high as 120 (another 10% from here – though exhaustion indicators are starting to appear), but at a certain point purchasing power parity will kick in and currencies will reflect relative valuations. On a purchasing power parity basis the pound is very cheap at $1.14.

The other observation I make about the above chart is that new administrations have often marked turning points in the currency. This, one could argue, was the case for Wilson, Callaghan, Major, Brown, Cameron, May and Johnson.

Despite the Tories’ record for incompetence, Liz Truss has put together a cabinet that is, broadly speaking, actually conservative. Unlike previous administrations, it is not full of wets and social democrats, who happen to be in the Conservative Party. Lower taxes and less spending (I’ll believe that when I see it) should lead to economic growth, which should help the currency. The big kahuna though is where the Bank of England base rate goes – and indeed the Fed Funds Rate.

I’d say there is a not unreasonable chance that, with a new government, we could mark a turning point for the pound. We’re at a point of extremity where such a turn could happen. But let’s see what government does first, before we get too excited. As I say, another not totally unreasonable possibility is that we are in the endgame for fiat. In that case the pound slides below parity.

Dominic will be performing his lecture with funny bits, How Heavy?, about the history of weights and measures, at the Museum of Comedy in London on September 28 and 29. You can buy tickets here.

“Financial markets express their faith – or lack of it – in a country” through its borrowing costs and the value of its currency, says Russ Mould of AJ Bell. In the UK, investors “do not like what they see”. On Monday the pound slumped close to its lowest level against the dollar in 37 years, trading as low as $1.14.

Rapid interest-rate hikes in the US have seen the greenback strengthen against most currencies this year – it recently hit a 24-year high against the Japanese yen. But sterling has done especially poorly of late. In August the pound lost 4.5% against the dollar, its worst monthly performance since October 2016, and also fell almost 3% against the euro.

The pound’s fall comes despite the fact that the Bank of England has been raising interest rates, a move that would normally strengthen a currency. “Until August, there had never been a month when sterling fell by as much as 4.5% against the dollar and ten-year gilt yields rose by more than 90 basis points,” according to data going back to 1971, say William Schomberg and Dhara Ranasinghe on Reuters.

The fact that gilt yields are rising (see below) even as the currency falls “is indicative of overseas investors losing confidence in the UK”, says Mike Riddell of Allianz Global Investors. “I think the UK and the gilt market are in a degree of danger.”

A toxic cocktail

Traders are reacting negatively to Liz Truss’s proposed “cocktail of especially loose fiscal policy, attacks on the central bank and conflict with the EU”, says Hugo Dixon on Reuters. If she’s not careful “the pound could be clobbered”. Truss is not alone in wanting to spend more on the energy crisis, but the trouble is that the UK is especially vulnerable to inflation, says Ian Johnston in the Financial Times.

Core inflation is running at 6.2% here, compared with 4% in the eurozone. That means that “pound for pound, euro for euro, fiscal spending by governments will be more inflationary in the UK” than elsewhere in Europe, says Antoine Bouvet of ING. The UK’s large current-account deficit – which hit £44.2bn, or 7.1% of GDP, on an underlying basis in the first quarter – leaves it vulnerable to the whims of financial markets. The gap needs to be covered by foreign capital.

If global investors lose confidence in Britain then a “balance of payments crisis” and sharp sterling devaluation cannot be ruled out, says Shreyas Gopal of Deutsche Bank. “We estimate trade-weighted sterling would need to fall by a further 15% to bring the UK’s deficit back to its ten-year average.” Such a scenario is not unprecedented: the UK had to turn to the International Monetary Fund for an emergency loan in 1976 following “aggressive” spending, a nasty energy shock and a decline slide in the pound.

Goldman Sachs analysts recently warned that UK inflation “could soar above 22% next year”, says Liam Halligan in The Daily Telegraph. Price pressures herald an autumn of “widespread industrial action and even civic unrest”. Britain’s sliding pound risks becoming “a symbol of economic weakness and a broader lack of governance”.

The bond bear market will get worse

Ten-year UK gilt yields hit 3% on Monday for the first time since 2014. Rising yields are a reminder that there are limits to government borrowing, says The Times. With “the ratio of public debt to GDP…close to 100%, policymakers need to be wary”. For all Liz Truss’s talk of faster growth, “there is ultimately no route to national wealth by inflationary public financing and currency depreciation”.

Bond yields move inversely to prices, so it has been a miserable year for fixed income. The Bloomberg Global Aggregate Total Return index, which tracks global investment-grade government and corporate debt, has lost more than 20% since peaking last year. A decline of that magnitude marks a bear market. This is the first time the index has entered a bear market since its inception in 1990. Bear markets are “virtually unknown in bonds”, says David Randall on Reuters. Between 1990 and its January 2021 peak, the global bonds index “delivered an aggregate total return of nearly 470%”.

This year has thus proved a rude awakening, says Steve Goldstein for MarketWatch. This is likely to be “the worst year for US fixed income since at least 1928”. Bonds are widely considered to have been in a “secular” bull market since the mid-1980s, say Garfield Clinton Reynolds and Finbarr Flynn on Bloomberg. Yet soaring inflation and tighter monetary policy may have finally slain the bond bull. Bonds in Europe have led the sell-off, with a Bloomberg index that tracks investment-grade sterling bonds also falling into a bear market last week.

There could be more pain to come, says Jack Denton in Barron’s. “If there is a recession but inflation persists, forcing the Fed to keep turning the screws on financial conditions, the bond bear market might only get hairier.”

After a month or so of welcome respite, the dreaded US dollar has got stronger again.

It really is the scourge of everything.

Stockmarkets have been walloped, the yen, pound and euro have been walloped, and commodities have been walloped.

Let’s look at a couple of charts.

The dollar just keeps marching higher

The US dollar index shows the dollar against the currencies of its major trading partners – the yen, the euro and so on – so it is perhaps the most useful vehicle to study the dollar.

Given the magnitude of foreign exchange markets and the fact the US dollar is the global reserve currency, I see its price as the most important price in the world.

Here we see the US dollar index over the past three years.

You can see that textbook double bottom it made in 2021, with the pattern completing in June. We were warning about it – see here and here – and we ask ourselves, yet again, why it is that we are so unable to heed our own advice.

Since then, through all of the financial and inflationary turmoil of the past year, it has marched inexorably higher. Now it’s retesting its highs around 109.

My stated fear for some time is that it goes to 120. Why 120? There is some history there.

Here is the dollar since 1980. You can see that 120 is the level it got to shortly after the turn of the century – and where it peaked around 2001-2002, helping to usher in that epic bull market in commodities.

It actually got to 165 in 1985 – after Fed chair Paul Volcker tightened a lot quicker and harder than anybody else – (not unlike what is happening now). The G5 nations – France, Germany, Japan, the UK and the US – then agree to weaken it so as to reduce the mounting US trade deficit. What followed were epic bull markets in both the Japanese yen and the German mark, and the stage was set for Japan’s “lost decade”.

This agreement was known as the Plaza Accord. I don’t think we are quite at Plaza Accord levels of concern yet, by the way.

Heaven knows what happens to the UK and Europe if the dollar goes to 165 again. But if it gets through 109, I would say 120 is back on the cards, possibly even this year, more likely early next.

The US dollar is the best of a bad bunch

The euro just slid below parity with the dollar yesterday. The last time that happened was around the turn of the century (when it got to €0.82). It’s at 20 year lows. The pound’s at $1.17 – that’s flash crash, Theresa May Conservative Party Conference depths of rubbish.

The reasons the US dollar is rising are fairly obvious. Capital is panicking and the dollar is the first place it goes to in a panic. It should be gold that capital flees to, really, but it isn’t. It’s the dollar.

Then there’s the fact that the Federal Reserve Bank, America’s central bank, is tightening faster and more aggressively than the Bank of Japan, the Bank of England or the European Central Bank. Europe and the UK, meanwhile, have a plethora of gas-related problems and looming winter crises that they could do without.

Forex-wise, the US dollar is the best house in a bad neighbourhood. You could say the same about its economy more generally.

Yesterday was a grim day in the stockmarket, but there were some observations I was happy to make. First, that base metals – copper, zinc, tin, iron ore, and so on – which took one hell of a beating in June, actually held up quite well. That would suggest that they may have already made their lows.

The action in precious metals – platinum and silver especially – over the past week has been less encouraging. Ditto bitcoin.

Oil, meanwhile, looks like it is making an interim bottom and turning up. The last thing central planners want now is higher oil prices, but the market gods will care very little about that.

Might be time to load up again on oil stocks if you are not already loaded. But more broadly speaking, these are risky markets, to put it mildly. Stay defensive, conserve capital, hunker down and await more benevolent financial climates.

Dominic will be performing his lecture with funny bits, How Heavy?, about the history of weights and measures at the Museum of Comedy in London on September 28 and 29. You can buy tickets here.

“Recession in the eurozone is priced in,” say analysts at Japanese banking giant Mizuho. On Tuesday the euro slumped to parity with the US dollar – the lowest the euro has traded against the US currency since 2002. The selloff followed growing concern that the shutdown of the Nord Stream 1 gas pipeline to Germany for annual maintenance could turn into a more permanent closure.

“The ECB [European Central Bank] is fiddling while the currency burns,” Neil Wilson of Markets.com told Julia Kollewe and Graeme Wearden in The Guardian. “Inflation above 8% and interest rates remain negative … it’s madness.”

The euro’s slump could be a foretaste of what is to come if a Russian gas cut does materialise, say Lynn Thomasson and Farah Elbahrawy on Bloomberg. Economists at UBS think that the single currency could hit €0.90 to the dollar in that scenario, with corporate earnings falling by more than 15% and a 20%-plus drop in the Stoxx 600 index of pan-European stocks. German equities are already feeling the chill after tumbling 11% since June. Shares in gas giant Uniper, which is seeking a government bailout, are down 77% this year.

Considering the circumstances – “the worst geopolitical crisis in Europe since the World War II” – the euro isn’t holding up all that badly, says Ambrose Evans-Pritchard in The Daily Telegraph. This is not so much a story of euro weakness as of the dollar’s strength against nearly all other big currencies.

Note that the Japanese yen and the Swedish krona have fared even worse against the greenback this year. The dollar index, which tracks the US dollar‘s value against a basket of six major trading partners’ currencies, “has gone mad as the US Federal Reserve engages in frenetic triple-decker rate rises, belatedly scrambling to contain the inflationary blow-off of its own monetary creation, and to rein in the greatest fiscal expansion since Roosevelt’s New Deal”.

Economic logic

The dollar’s rally is a matter of “economic logic”, says James Mackintosh in The Wall Street Journal. At a time of soaring global energy prices it makes sense for investors to head for America – a country that is “self-sufficient in energy” because of fracking – rather than Japan or Germany, which need to import oil and gas from elsewhere. At some point the current dollar bull trade will flame out, but “without a trigger – a peace deal in Ukraine [that] might restore cheap gas to Germany, or perhaps a dovish turn by the Fed – it is hard to see what could prompt the dollar to turn”.

The dollar looks to be trading somewhere “between 10% and 20% north of fair value” at present, say Themistoklis Fiotakis and Sheryl Dong in a Barclays note. In the medium term that overvaluation should unwind, but don’t bet on it happening anytime soon. The dollar’s current strength rests on its role as a haven in uncertain times. Another “Covid-19 flare-up in China” or “more disruptions to the flow of Russian natural gas to Europe” could yet drive the greenback even higher.

Last week, the US dollar hit its highest level in nearly 20 years by one popular measure. The US dollar index looks at the value of the US dollar against a basket of six other major currencies. The euro carries by far the biggest weight at more than half of the basket, with the rest comprising (in order of size) the Japanese yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc. The index started life in 1973, just after the US left the gold standard, with a value of 100. It’s had plenty of highs and lows since – it hit its all-time low in 2008, at just above 70, while its high came in 1984, at almost 165.

It is now sitting around 106. That may not sound dramatic, but it’s the highest since November 2002, and the move has been rapid – the dollar is up by nearly 10% against the euro this year alone, and an extraordinary near-20% against the yen. Why does this matter? The dollar is the global reserve currency; it dominates global trade and central banks around the world have it at the core of their reserves. Put simply, everyone needs dollars. So when the price of a dollar is going up relative to everything else – as it is now – that effectively means liquidity is getting tighter across the globe, not just in the US. This is at least one reason why markets everywhere are struggling.

Why is the dollar so strong?

Given that most countries are by now raising interest rates and tightening monetary policy (which typically results in stronger currencies), why has the dollar raced so far ahead? Its strength has a pretty straightforward explanation, says liquidity expert CrossBorder Capital: the US is tightening monetary policy more aggressively than everyone else – “quantitative tightening” by the Federal Reserve “is outpacing all other major central banks”. On top of that, you have a feedback loop whereby a stronger dollar hurts risky assets, which scares investors, who then run for the perceived safety of the dollar, driving it higher again.

What does this mean for your money? There is little point trying to time currency markets and they certainly shouldn’t be your priority when thinking about asset allocation (if you’re a sterling investor with a well-diversified portfolio, you probably have plenty of dollar exposure anyway).

But it might be worth looking for longer-term opportunities. Take emerging markets. As Ruchir Sharma notes in the Financial Times, most are in far better shape now than during previous dollar-driven crises. Indeed, “the share of countries suffering rapid inflation (above 5%) is higher in developed markets than in emerging markets”. Overseas investors have fled India at record rates, reports Goldman Sachs. One option to consider is the Aberdeen New India (LSE: ANII) investment trust, on an unusually high discount of 18%.

I wish I knew what PPP was, but I’m too embarrassed to ask

Purchasing power parity (PPP) is a theory that tries to work out how over- or undervalued one currency is relative to another. It does this by comparing the price of identical goods in different economies. The idea is that a similar basket of goods should cost roughly the same wherever you go.

Why? Because if goods are cheaper in one country than in another, then that country should be able to export them to the other for a profit. In turn, those sales would boost demand for the exporter’s currency, driving the exchange rate higher, and eliminating the difference between the two. As a result, purchasing power between countries should tend towards parity in the long run.

The best-known PPP currency indicator is the “Big Mac index”, published by The Economist since 1986. It shows the value of a McDonald’s Big Mac burger in US dollars, all across the globe. Clearly the index is not especially scientific, but as a Big Mac is a product that can be bought in almost any country in the world and is comprised of the same input costs (raw materials and labour) and is distributed in almost exactly the same way wherever you go, it’s as good an approximation as you’ll get.

As of early January 2022, the index had a Big Mac costing £3.59 in the UK and $5.81 in the US. At the prevailing exchange rate at the time of $1.34 to the pound, that meant a Big Mac in the UK cost just over $4.80, suggesting the dollar was about 20% overvalued relative to the pound.

PPP is useless as a trading tool – like most other assets, currencies can stay out of line with their “fundamental” valuation for far longer than seems sustainable. However, using PPP to adjust GDP figures can be a useful way for economists to compare GDP between nations without the distorting impact of relative currency valuations, which can make living costs look higher in developing countries than they really are.

We suggested a couple of weeks back that oil might be the next market to drop and so it has turned out.

Both Brent and West Texas Intermediate are back below $100 a barrel, and they join the metals on the downward slope.

The euro, and maybe even the pound, could hit parity with the US dollar

Metals have been battered even harder, with silver – as often seems to be the way – leading the fall downwards.

How can silver be trading below $20 an ounce? How can platinum be below $850?

I’m not saying they aren’t going lower; they probably are. But there will come a time in the future when we’ll be wondering how on earth it was possible to buy these metals at these prices.

Silver below $20. Platinum below $850 – platinum is half the price of gold!

Remember when nickel went to $100,000 per tonne? It’s $21,000 now.

Wheat’s at $800; it was $1,300 in March. Corn, oats, soybeans, lumber – you name it, there’s carnage.

Never underestimate the bust-to-boom-to-bust potential of raw material markets, I guess is the lesson. They always seem to return whence they came.

With this rout in commodities prices, this inflationary episode could yet prove to be transitory. (I stress I’m using the word inflation with its modern meaning: rising prices of goods in the CPI basket. The other kind of inflation – debasing money by creating too much of it – isn’t going anywhere).

The villain in the piece has been the US dollar. The dollar index is now at 107. Can it go higher? Maybe; it’s come a long way already.

In June of last year we thought it had made a double bottom at 89-90. 103 was the huge line in the sand – it got through that at the second attempt. 120 is the next big one. It really would be an outlier if it got there – but this is a time of outliers.

The euro is now $1.01. Parity beckons. In 2000, with the dotcom chaos, it got to $0.82 (this was also before it had fully launched across member states). Is it going there again? Again, it would be an outlier, but it’s possible.

The pound’s at $1.18. I wouldn’t rule out parity there either.

Could capitulation by the Bank of Japan mark the end of the dollar bull run?

But I will say this: “long dollar” is a crowded trade. Everybody’s talking about it. When it turns – and it will – there’s going to be a lot of money made on the other side of this trade. FX traders are going to be all over it. Long anything anti-dollar – gold, the euro, perhaps even the yen.

The yen’s at lows not seen since the Asian crisis of 1998. But could Japan have its own “Swiss bank” moment?

I’m referring to 2015, when Switzerland announced that it was going to abandon the franc’s peg to the euro (it was pegged at €1.20 to the franc) and the franc instantly shot up 20% as a result. That is an astonishing amount for a major currency.

The move destroyed many a forex trader’s fortune, not to mention the many people who had Swiss-denominated mortgages and other forms of debt. Many of them were from poorer nations with weaker currencies.

The yen is not pegged to any currency, but the Bank of Japan has committed to holding its benchmark ten-year government bond yield to 0.25%. With this so-called yield curve control, it pins down borrowing costs and “stimulates growth” (ergo causes asset price inflation – except that it hasn’t worked for years).

For decades now, shorting Japanese bonds (ie, betting on higher yields) has been the mother of all widow-maker trades. I’m not ready to fall into that trap, even if Japan’s buying of its own bonds has gone nuts – see the chart below.

The government now owns over 50% of its own bonds, and the rate of purchase has only accelerated as it tries to hold the ten-year yield at 0.25%, even as the rest of the developed world starts “quantitative tightening” (ie doing the opposite).

But even with private sector savings exceeding the fiscal deficit and so much government buying, Japan may have to stop defending the 0.25% mark. It may be because yields get too low relative to other nations. It may just be that inflation pushes it over the brink (and a weaker currency means higher inflation).

But, cripes, there is some reversal in the yen (and thus in the dollar) that is waiting to happen.

Here’s the yen since 1990 (when the red line falls, the yen is getting weaker – the Y-axis shows how many dollars you can buy for ¥10,000).

I don’t know when the dollar turns – but there’s going to be a mad scramble when it does.

Dominic will be performing his show, How Heavy?, a lecture with funny bits about the history of weights and measures, at the Edinburgh Fringe this August. You can get tickets here.

“Investors are increasingly discussing GBP as taking on emerging-market characteristics… parallels to the 1970s resonate as being one of the worst post-war decades for the UK,” says Kamal Sharma of Bank of America. The pound has been the third worst-performing currency in the G10 club of developed countries this year, behind the Japanese yen and the Swedish krona.

Blame the “increasing politicisation” of UK monetary policy, which is undermining confidence in sterling in a way reminiscent of an emerging economy, while foreign investors are less willing to fund the UK’s trade deficit as UK assets now appear less undervalued than they were in 2021.

Comparison of the pound with an emerging-market currency is “hyperbolic”, but “it is true that sterling no longer behaves like the hard currency it once was”, says Jim Armitage in The Sunday Times. “Since December, the Bank of England (BoE) has hiked rates four times – but the pound has barely reacted.” A “currency’s strength is, in large part, a reflection of the market’s view on the productivity and strength of the economy behind it”.

Since Brexit sterling has been valued at a discount to account for the diminished prospects for British exporters and rising UK labour costs.

There are valid questions about the BoE’s performance, says Jeremy Warner in The Daily Telegraph. “Too often it seems a creature of the government’s need for deficit financing”, rather than an independent institution. “The government’s refusal... to acknowledge that Brexit has played any part in deteriorating trade only further inflames the situation.”

That doesn’t mean sterling’s days are numbered. A strong dollar explains as much as any domestic UK problems. “Against the euro, the pound’s lost only a couple of cents.”

SEE ALSO:

If the US dollar keeps rising from here, it’s going to hurt

The pound is falling hard – is a UK recession on the cards?

After weeks of speculation, the day of reckoning has come. UK prime minister Boris Johnson faces a no-confidence vote later today, after at least 54 MPs submitted letters requesting his removal from office.

Conservative MPs will vote in a secret ballot between 6pm and 8pm tonight to decide if they still want Johnson to serve as PM.

How did we get here?

A confidence vote was triggered after at least 54 Conservative MPs (the minimum number required to meet the 15% threshold) wrote to Sir Graham Brady, chairman of the 1922 committee of Tory backbenchers, requesting that Johnson be removed from office.

To stay in power, Johnson would need to win at least 50%-plus-one of MPs’ votes.

We’ll leave the politics to other commentators, but what does the vote on Johnson’s future mean for sterling?

Why has the pound moved higher?

The threat of the imminent removal of a leader might seem to be a bad thing for a country’s currency.

During the political upheaval that surrounded Theresa May’s efforts to push Brexit through, the pound swung violently, yet despite today’s vote, sterling has been trading higher against both the US dollar and the euro. So what’s going on?

Daniela Sabin Hathorn at spreadbetting group IG notes that today’s vote is very different to the vote against May, in that it won’t make a huge difference to the UK’s economic direction. “The positive momentum in sterling suggests that markets are not worried about the outcome of the vote… as the impact on the economic outlook is likely to be limited.”

Other analysts note that the pound’s move higher is nothing to do with the vote, and is much more the result of a weakening US dollar, as many central banks across the world embark on catch-up interest-rate rises to combat inflation.

What is the outlook?

Markets believe it’s unlikely that Johnson will lose, says Bloomberg: “Bookmakers are offering long odds on Johnson’s ouster, suggesting their belief that such a scenario is unlikely.”

If Johnson escapes eviction today, he cannot be challenged for another 12 months – in theory, at least. However, that doesn’t mean the rules could not be changed.

It’s also worth noting that while May survived her no confidence vote in 2018, she still stepped down less than a year later, so merely surviving the vote is no guarantee that Johnson will remain in power for the next election – or that the uncertainty will go away.

It is also worth noting that the pound had anyway been on a somewhat poorly trajectory and has recorded five consecutive months of losses due to Britain’s sluggish growth forecasts.

So the pound could see some further pain for reasons outside of the confidence vote. “The pound remains vulnerable in the short term given worsening growth prospects and a potential re-pricing of BoE rate expectations,” ING Bank Analysts told Reuters, adding that a fall below $1.25 could pave the way for further declines to $1.230-$1.235.

There are a few contenders for the title of “most important price in the world”.

The most important is probably the US ten-year Treasury yield – that is, the interest rate that the US government has to pay to borrow for a decade.

This is generally regarded as the global “risk-free” rate. It’s not too much of an exaggeration to say that every other asset in the world is priced with reference to this slab of US government debt.

But a close runner up is the US dollar.

A strong US dollar sucks money out of risk assets

The US dollar is one of the most important prices in the world.

It’s the global reserve currency – everyone needs US dollars. As a result, when the price of US dollars goes up, you can view it as monetary policy getting tighter around the world (that’s an oversimplification, but it’s quite a useful one).

This is at least one reason markets have struggled in recent months; the Federal Reserve, America’s central bank, has been ahead of other economies in terms of raising interest rates, while the US economy has also looked relatively resilient. The US dollar is also a “safe haven” asset, which means that it benefits when investors are feeling jittery.

As a result of all this, the dollar has shot up in value against other major currencies. And risk assets don’t like that one tiny bit. As my colleague Dominic pointed out earlier this month, “if the US dollar keeps rising from here, it’s going to hurt”.

The good news is that after a burst higher, the dollar is now a little lower than it was when Dominic wrote that piece.

One key reason for that is the European Central Bank (ECB) – we’ll explain why in a minute. First, what’s the ECB done?

Well, yesterday, ECB chief Christine Lagarde came out with a blog post in which she – unusually for a central banker – was really quite clear about what the central bank will be doing over the next couple of quarters.

To summarise, she said that the ECB will stop printing money soon, it will start raising interest rates in July, and by the start of October rates will be back to 0% (ie, out of negative territory).

That’s quite an emphatic change for the ECB. As Marcus Ashworth says on Bloomberg, “I struggle to recall any central banker, certainly not one from the ECB, ever having been this definitive about the monetary policy outlook.”

There are probably two reasons for it. One is that the ECB has been lagging somewhat. Inflation has taken off in the eurozone too, but unlike the US, the economy has looked weaker so it’s been a tougher juggling act. But now it looks as though the hawks (for want of a better word) have won.

The second reason is that the euro was threatening to hit parity with the US dollar. In pure market terms, parity is just another number, no more or less significant than 1.01 or 0.99. But of course, it’s not actually just another number; it’s a big scary round number and one that grabs headlines. It’s probably best avoided if possible.

Part of a central bank’s role is to act as the guardian of the currency. That’s even more important in the eurozone than elsewhere because the euro is young and the lack of full political union between all of its member countries means there are still serious fault lines that could threaten its existence.

This risk has retreated greatly. During the sovereign bond crisis of the 2010s, the ECB, under Mario Draghi, effectively won the right to print money to suppress national bond yields – and thus underwrite the solvency of individual eurozone nations – where necessary.

But it’s better not to get to the point where markets decide to test your resolve on that front.

Why a stronger euro might be good news for markets

So why is this good news from a strong dollar front?

Because the euro is the “other” global reserve currency. It’s miles behind the dollar in terms of being stockpiled by central banks around the world, but it is the biggest component in the “DXY” index which measures the dollar’s strength against a basket of rival currencies. It is probably the most widely-watched barometer of dollar strength.

As a result, when the euro bounces against the dollar, DXY tends to fall.

And what with this being quite a hawkish turn for the ECB, the euro rallied from falling as low as $1.03-ish last Friday, to heading above $1.07 now.

Meanwhile, on top of that, it helped that one of the monetary policy setters at the Fed – Raphael Bostic, the head of the Federal Reserve bank of Atlanta – said that it might make sense for the Fed to pause for breath in September on interest-rate rises.

That’s hardly a wildly dovish statement (it implies half-point increases in both June and July), but with the market currently sweating that Fed boss Jerome Powell hopes to inherit the mantle of inflation destroyer from Paul Volcker, any sign that the central bank might relent is welcome to investors.

A weaker dollar would be good news for investors, as it implies that the rush for safe havens will ease and investors will start seeking risk again.

That doesn’t mean it’ll happen. However, one feasible scenario in which this might continue is one in which inflation ebbs (even while remaining high) and other central bank policies start to converge with that of the Fed.

That’s certainly possible over the coming months. Does that mean you should be piling in as if everything is back to the tech bubble days? Not at all; the environment has changed and the winners over the next phase will differ from those of the last.

But it does imply that the “crash-y” behaviour we’ve seen since the start of this year might be due a breather. Fingers crossed.

For more see:

If the US dollar keeps rising from here, it’s going to hurt

The tech bubble has burst, but I still want a Peloton

Japan has become “the land of the sinking currency”, says Russ Mould in Shares. The yen is trading close to a 20-year low at 130 to the US dollar, having fallen 16% over the past 12 months. The main cause is divergent monetary policy: while US policymakers rush to tame inflation running at more than 8%, inflation in Japan is still below target at only 1.2%.

Thus Bank of Japan governor, Haruhiko Kuroda, is in no rush to raise short-term interest rates from -0.1% or to abandon yield-curve control, a policy that caps ten-year government bond yields at 0.25%. In any case, while politicians have begun to “fret” about the weaker yen raising the cost of living, there is little they can do, says The Economist. “Deep forces are driving the yen’s depreciation…Fuel and raw materials make up roughly one-third of Japan’s import bill”, leaving the country especially exposed to the global commodity price spike. Some think “the yen could continue falling, perhaps to ¥150 to the dollar, a level unseen even during the Asian financial crisis of 1997-1998 (when it fell to ¥147 to the greenback)”.

A fading export power

The yen is now at its lowest level in real terms since the early 1970s, says the Financial Times. In past decades, “such weakness would have prompted furious recriminations between Tokyo and Western capitals, which lived in fear of cheap Japanese imports”. But times have changed. A weak yen will see Japan soak up global inflation, while exporting deflation. That’s just what “an inflation-hit US wants”.

The weak yen could be a buying opportunity, says David Brenchley in The Sunday Times. Historically, Japanese stocks do well when the yen weakens. A weaker currency makes Japanese exports more competitive and flatters the earnings of multinationals in yen terms. “Between September 2012 and June 2015 the yen fell 60%, while the Nikkei 225 index of large Japanese companies rose 120%.”

But the idea that a weak yen is good for Japan’s export-oriented economy is “a distorted echo of the past”, say Marc Chandler and Omkar Godbole in Barron’s. At 15% of GDP, exports now account for a smaller part of Japan’s economy than the UK’s (28%) or Germany’s (43%). Offshoring means that Japanese exporters get less of the upside from a weaker yen than they used to.

For example, two-thirds of the cars that Japanese firms sell are made abroad, say Satoshi Sugiyama and Maki Shiraki for Reuters. “Almost a quarter of Japanese manufacturers’ production is carried out overseas”, up from less than 15% two decades ago. Kuroda insists that the current spurt of inflation will help Japan shake off its deflation problem. He may be right, but “some of Kuroda’s former finance ministry colleagues now see the weak yen as a sign of Japan’s fading economic power”.

Talk of “currency wars” became popular in the wake of the 2008 financial crisis. During that period, when demand was extremely weak and central banks desperate to avoid deflation, it seemed that every country with the ability to do so was trying to devalue its money so as to boost exports and steal growth in a “beggar-thy-neighbour” race to the bottom.

We’re now in a very different environment, says Vincent Deluard of financial services group StoneX. While the 2008 financial crisis destroyed demand (everyone had too much debt) while maintaining supply, which was deflationary, the Covid-19 pandemic and ensuing lockdowns destroyed supply (businesses were shut and supply chains halted), while maintaining demand (as governments paid wages).

This has proved inflationary, which demands the opposite approach to that seen after 2008. Given that economies are at full capacity, the only way to boost supply without raising inflation is to import – “strong currencies are needed to lower commodity bills and steal trade partners’ output”, says Deluard. In short, “the winners of the currency wars of the 2020s will be the currencies which can rise the fastest”.

The six winning currencies

Currency exposure is not the most important factor to worry about when considering where to put your money. However, it might help to guide you as to where to allocate the overseas chunk of your equity portfolio – or give you some ideas as to which currencies to hold in the cash portion of your portfolio. So which are best placed to win? Deluard lands on six: the Australian, Singaporean and Canadian dollars, plus the Swiss franc, the Norwegian krone and the Chilean peso.

Sharp-eyed readers will note that four are commodity currencies: Norway and Canada are oil plays, while Australia and Chile export lots of key metals. Meanwhile both Norway and Switzerland have vast reserves: “Every Norwegian and Swiss owns $243,000 and $128,000, respectively, in foreign assets,” notes Deluard.

Singapore’s dependence on commodity imports is a weak spot but it has a healthy national balance sheet (with net debt of zero and a triple-A credit rating) and a strong track record of controlling inflation. Note also that the Singaporean market as a whole looks relatively inexpensive right now, particularly as Singapore re-opens post-pandemic.

If you’re investing in overseas shares be aware that foreign exchange is one of the few areas where brokers and banks can still get away with charging ridiculously high fees in the form of rip-off exchange rates, so do double-check what you’re being charged on that front.

SEE ALSO:

Buying foreign shares is easier than you think – here's how to do it

Stockmarkets have taken quite a tumble this past week or so, and there has been a great deal of noise about the end of the tech bubble. Even with some 70%-plus corrections, many tech companies’ valuations remain extraordinarily high.

What seems to have gone rather less reported is the extraordinary battering that metals have taken too. Whether base or precious, ferrous or platinum group, Russia-centric or dispersed, they have been walloped.

The reason? Their nemesis has risen.

The US dollar is the most important price in the world

We have been fretting about the US dollar for some time now on these pages. A year ago in June, we declared, “everything hinges on the direction of the dollar” and then in November we warned investors to “beware – the most important price in the world is rising”.

We were worried at first that it would rise, and then that it was rising. Well, talk about risen.

The US dollar has been, of late, doing its best impersonation of bitcoin on one of its bull runs. It’s gone parabolic and right now, it’s at a particularly critical juncture.

The problem with the dollar is that, when it rises, everything else tends to go down the Swannee – generally speaking, of course. It’s a bit of a chicken and egg job – I’m never quite sure if the dollar is rising because everything else is tanking, or if everything else is tanking because the dollar is rising.

In any case, we speculators prefer an environment in which asset prices rise and the dollar falls. We may give it the big one about the Federal Reserve’s money printing, but we still want them to do it if it means the well being of our portfolios is preserved –central bankers and politicians are not the only hypocrites!

But back in June we identified two key levels for the US dollar: 88-89 and 103. This is the US dollar index we are talking about here; the US dollar measured against the currencies of its major trading partners – the euro and the Japanese yen mostly, with a bit of pound sterling, Swiss franc, Canadian dollar and Swedish krona thrown in.

The only currency that has been outperforming the dollar of late has been the Russian rouble. Go figure. But note that one is the petrocurrency and the other is gas money – fossil fuels pay. Indonesia should start demanding rupiahs for its coal (it’s the world’s largest exporter).

In any case, after its bonanza of the last 12 months, the dollar index now stands at 103. With the exception of the dotcom bust era of 2000-2002, this would be as high as it has been since 1985, when the G5 nations had to get together and agree the Plaza Accord to devalue it.

Yet even with its relative might, US inflation still stands at 8.5%. That’s fiat currency for you.

Investors should pray that the US dollar starts falling from here

I cannot stress enough what an important technical level 103 is. If the dollar goes above 103 and stays there, what is currently an eye-watering situation is going to become eye-bleeding.

If it makes a high here or does a false move and a fast one in the other direction, then the long metals, anti-US dollar, inflation trade is back on. In fact, it’s pretty extraordinary how well metals have done this past year, given US dollar strength. That’s shortages and years of under-investment for you. Wait and see what happens to them if the dollar starts falling!

Let’s take a look at the long-term chart of the US Index to give you an idea of where we are in the grand scheme of things.

This recent rally looks minuscule on the 40-year chart, but let me tell you, it’s been quite something. As anyone who followed it through 1984, 2008 and 2014 will tell you, parabolic US dollar moves can go on longer than you might think. But dollar moves also tend to end with spikes such as the one we have just seen. And 103 is an obvious place for a spike to end.

The Fed is likely to raise the federal funds rate by 50 basis points at its rate-setting meeting this week. That much is priced in already, I’d say. We’ll know more when Fed boss Jerome Powell makes his speech.

But one wonders if general geopolitical jitters are a bigger factor here. If we get a move above 103, and 120 comes back into the frame. That really would hurt. But in this increasingly nuts world, the only real surprise seems to be no surprises.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.

The Chinese yuan has fallen by more than 3% over the past week.

Why should you care about what’s happening with exchange rates, let alone the price of a relatively minor currency (in global reserve terms) like the yuan (or renminbi)?

Well, because the last time this happened markets crashed. Forewarned is forearmed, and all that.

China’s currency just saw its biggest drop since 2015

Foreign exchange rates are good indicators of where capital is flowing to and where it’s flowing from. Ultimately, asset prices are driven by changes in capital flows. As for what drives capital flows – a good rule of thumb is that capital flows to where it is treated best. And right now, that’s not China.

The last time the yuan weakened like this was in August 2015 when China was in the midst of another economic slowdown. Now, you probably don’t remember the panic of 2015 because it didn’t really end up amounting to much and it’s been a hectic few years since then.

But it’s worth noting that China’s 2015 slowdown was one factor that prevented central banks in the developed world from raising interest rates.

So what’s going on?

Most obviously, there’s Covid. It’s easy to forget now, but around this time two years ago, when the UK was in the depths of lockdown, we were all looking to China to try to figure out what re-opening would look like, as lockdowns were just starting to end there. Now China appears to have gone back to square one with extremely severe lockdowns.

Secondly, this is happening at a time when China’s economy has been on shaky ground for quite a while. This is probably best exemplified by the slowdown in the property market which caused all the talk of “China’s Lehman moment” a few months ago.

Thirdly, as a result of all this, China is now on the wrong side of the central bank rate-raising cycle. China’s slowdown means it’s not going to raise interest rates – but the US is, and, all else being equal (it never is, but rates matter more than most things) higher rates will attract more money than lower rates.

Anyway, last time this happened markets got very wobbly, which is one reason why central banks decided against raising rates.

As you may well have noticed, markets are pretty wobbly right now as well. So a few questions arise from all this.

The Chinese slowdown complicates matters

This slowdown in China appears to be here to stay.

As Bill Bishop, who writes the China-focused Sinocism newsletter, notes: “it is hard to be positive about the economy or the markets in the face of increasing lockdowns of indeterminate length and intensity... even if policymakers were to announce bigger stimulus measures and rate cuts, how would the effects transmit through an economic system increasingly held hostage to the current anti-epidemic policies?”

This is a new situation for the world. Markets have been used to the idea that China cannot allow economic growth to slow, because that would mean social unrest and not hitting its GDP target, which would embarrass the Communist party.

This was true to an extent – China bailed the world out in 2008 and when the 2015 slowdown hit; it also eased monetary policy. The world is not used to a scenario in which China is not operating as the growth powerhouse of last resort.

However, China is throwing a fly in the ointment when it comes to the idea of developed-world central banks stepping back from tightening monetary policy.

The problem with zero-Covid measures in China is that they are going to mean that the mess made of global supply chains will continue. It’s quite possible that at some point down the line this might mean we see great piles of inventory dumped at exactly the wrong moment.

But, given how long it’s gone on for, I suspect this really just means more pressure for more permanent solutions and more of a drive towards “reshoring” – in all, a further move towards “just in case” rather than “just in time” (which implies companies carrying higher inventories as standard).

All of that adds to inflationary pressure, even as a struggling Chinese economy might take some pressure off commodity prices.

What does it all mean for you as an investor? I think you just have to understand that we’re going to be in for a more volatile period generally, and that you need to approach your portfolio with that in mind.

It’s a terrible cliche to say that markets hate uncertainty. But it is true to say that one thing we’ve been able to take for granted for a long time – that central banks would always open the floodgates at any sign of economic or market disruption – has now changed. That’s a pretty significant shift and one that will take some adapting to.

I’d stick with your bets on inflation; I’d hold some gold (it’s handy to have in a panic); and I’d make sure you allocate more to cash than usual simply to have it around in case you need it or want it to take advantage of any opportunities.

Oh and subscribe to MoneyWeek magazine. You get six issues free right now.

The West’s decision to sanction Russia’s central bank raises deep questions about the future of the global monetary system, says Jon Sindreu in The Wall Street Journal.

The US and its allies have frozen Moscow’s access to more than half of its $630bn in foreign reserves in response to its invasion of Ukraine.

The implication – that reserves held by unfriendly governments can be turned into “worthless computer entries” – is likely to drive a shift out of dollar assets and into alternatives such as “gold and Chinese assets”. That could undermine the dollar’s role as the world’s leading currency.

Challenging the dollar’s hegemony

Dollar dominance rests on two pillars. First, it accounts for about 59% of the foreign exchange reserves held by the world’s central banks, far above the second-placed euro, on 20%. China’s renminbi accounts for less than 3%, a lower share than the British pound. Second, the dollar is the default currency used in international transactions. Oil, for example, is almost always priced in greenbacks. “In February only one transaction in every five registered by the Swift messaging system did not have a dollar leg,” says The Economist.

Yet the more the US “weaponises the dollar” against the likes of Russia and Iran, the more it “undercuts the attraction of the dollar as a reserve currency”, says Andrew Stuttaford in National Review. Saudi Arabia has moved to start pricing “some of its oil sales to China in yuan”. That’s “a noteworthy step as the Saudis have been selling oil exclusively in dollars since 1974”. India and China are setting up alternative payment systems to buy Russian energy.

The greenback’s hidden strengths

Still, the dollar’s rivals face steep hurdles. The renminbi is not fully convertible, meaning there are limits on how much it can be traded on foreign exchange markets. In a future crisis, “the Chinese government might not appreciate Russia dumping renminbi… to prop up the rouble”, says Eswar Prasad in Barron’s. Investors also expect a reserve currency to be backed by institutions such as “independent central banks… and the rule of law” that are much better established in the West.

That may help explain why, even as the dollar’s share of global reserves has slipped over the last two decades, the “chief beneficiaries” have been not China, but the small, open economies of “Canada, Australia, Sweden, South Korea and

These currencies are not so much rivals as “extended buttresses… providing options for diversification while continuing to benefit from the liquidity and sophistication provided by America’s financial markets”.

China and its allies may start to trade more in renminbi, but this is unlikely to account for a big slice of global trade, says Neil Shearing of Capital Economics. Few currencies can compete with the “deep and liquid” markets for dollar assets. Tellingly, “as China and Russia have tried to reduce their use of the dollar in bilateral trade”, they have turned to “the euro, rather than the rouble or renminbi”. A decade from now, “the most likely outcome is a more fragmented global financial system – but one that still has the US dollar at its core”

There's been a lot of excitement (if that's the right word) over the idea that Russia is no longer accepting dollars as payment for its energy.

Overall, it would prefer gold ("hard currency") or roubles, but it'll take most other national currencies as long as they're not greenbacks.

Is this the beginning of the end for US dollar hegemony?

The answer is "no".

Here's why...

The US dollar is not perfect...

Before we get into this I want to make one thing clear. I've written about the decline of the US dollar on several occasions in the past. I'm not a US dollar "maximalist" by any means.

It's clear that the US decided that the role of "World Police" was a burden and responsibility it could no longer be bothered to shoulder. The US dollar was also "weaponised" a long time ago. This weaponisation became overt as long ago as 2012, when Iran was sanctioned over its nuclear activities.

So anyone who feared that the US dollar might not be a financial operating system that was compatible with their own nation's values or ambitions had been given every reason to find alternatives well before the most recent sanctions were imposed on Russia.

Moreover, the US dollar has been declining as a share of central bank reserves for a long time. As economic professor and general currency commentator Barry Eichengreen pointed out in the FT the other day, the US dollar accounted for around 70% of foreign exchange reserves in 2001. Now it accounts for just 59%.

So dollar dominance as such, has been on the decline for some time. (Although "decline" in this case is probably the wrong word, because in fact what's happened is that most of this move out of the US dollar has been into smaller currencies – such as the Australian dollar, South Korean won, and Swedish krona – which have become increasingly viable as their markets have deepened, ie become more like American markets).

Anyway, all of this is to say that we are in complicated times, and that – as Eichengreen puts it – we are "already seeing movement towards a more multipolar international monetary system". I think it's also fair to say that the world has also been quietly hunting for an alternative to the post-1970s monetary order ever since the 2008 financial crisis.

But I don't feel that Russia's desire to trade energy in anything other than US dollars is particularly significant in terms of this hunt for a new monetary order.

... but what's the alternative?

Why not? You can argue that the US dollar is being debased by money printing. You can argue that the US is increasingly less reliable as a partner, given its willingness to cross the Rubicon when it comes to cutting countries off from the global reserve currency.

But you have to have an alternative. History shows that reserve currencies give way to one another when another comes along that is more attractive.

That's usually because the dominant power is on the way down, while the up and coming power is up and coming. That's how the pound gave way to the US dollar. But this is a simple symptom of the fact that capital flows to where it is treated best and where it finds the most opportunities.

The war has resulted in Russia losing capital of all kinds – financial, human, social. The country has had to impose capital controls in order to prevent capital from fleeing its borders. This is not the recipe for supplanting the global financial hegemon.

Think of it this way. Does Russia's demand to swap Russian energy for anything but US dollars make the world keen to find an alternative to US dollars? Or does it instead make most countries keener to find an alternative to Russian energy?

Neither Russia, nor China – the rising power today – have demonstrated any reason to trust them with your hard-earned capital. Russian property rights have always been built on a "gangster rules", "might is right" basis.

China loves foreign capital when it's made up of greedy overseas investors blindly recapitalising its banking system or foolish manufacturers handing over their intellectual property in hope of accessing a billion-odd Chinese consumers.

But when business people or shareholder capitalism start to kick off and threaten the grip of the Communist party or the social order, you see what happens. Mouthy entrepreneurs and A-listers vanish then come back three months later, much chagrined.

It's clear that China recognises that its recent approach has been toxic to foreign investment, and it is trying to wind that back. Hence the recent surge in Chinese tech stocks. This also explains its somewhat half-hearted support of Russia.

But I'd still be very wary of putting your money to work there.

The real threat to the US dollar is from the US abandoning its values

None of this is to say that the US dollar will be the global reserve currency forever. That’s just not how these things happen.

But the real risk to US dollar hegemony is internal. The real risk is that the US retreats from the things that make the dollar valuable as a reserve currency – rule of law; enforceable, well-respected property rights; and the protection of those rights for all, regardless of political perspective or socio-economic position.

That's why all this "culture war" stuff actually does matter. Creeping authoritarianism from within is a much greater threat to US dollar hegemony than the overt authoritarianism from hostile nations.

In short, the real risk stemming from weaponisation comes if and when a currency is weaponised against its own people.

Otherwise, the US only needs to worry if and when China decides to open up and embrace democracy and entirely free markets. Capital would flood in. But I suspect most of us would be rather happy about that because that's a pretty benign regime shift.

After all, for all the masochistic joy that some British people get in revelling in tales of decline, it's not as though Britain disappeared after the pound was no longer the world's reserve currency. Sterling remains significant and London is still by far and away one of the world's most important financial centres, underpinned largely by clear respect for property rights. Values matter.

So what could replace the US dollar?

So what about that long run? Well, if you agree with my basic thesis – that this is built on values and property rights – then I suspect that the biggest threat to US dollar hegemony is more likely to be bitcoin, or something like it.

There's a lot of utopian blather around cryptocurrencies, but the fundamental promise is an attractive one. Indeed, it's a currency rooted in precisely the values that underpin the US dollar and US democracy: secure property rights, freedom of individual action, and transparency without sacrificing privacy, to name but a few.

(Indeed, the ideal of bitcoin is so appealing that I've always thought that if you were a bad actor, and you wanted to find a way to undermine the status of the US dollar, you'd be hard pushed to find a better way to do it than to create something like bitcoin and then launch it during a world-shaking global financial crisis. But that's a conspiracy theory for another day.)

Anyway. Debasement – whether that be of the actual value of the currency or the philosophical values that underpin the currency – is a genuine threat to the reserve currency at all times. There's plenty of risk of that.

And you should certainly own some gold. It's a solid disaster hedge, it tends to do well when inflation surprises on the upside, and it will certainly stay in demand if authoritarian nations' central banks are looking for ways to diversify.

But Russia demanding payment for its oil in something other than US dollars? I just don't think that in and of itself, it's a big deal.

Feel free to disagree or point out where my reasoning has gone awry at editor@moneyweek.com.

The Budget (or the “Spring Statement” as they call this one) was the usual – tinkering around the edges, political point scoring, sound and fury, no meaningful reform.

Rishi Sunak might have a picture of Nigel Lawson on his wall, but he’s not emulating him. I had a picture of Kenny Dalglish on my wall for most of my childhood. Didn’t make me a good footballer.

Lawson removed a tax with every Budget, incrementally simplifying the tax code and lowering taxes over his six years in office.

Every chancellor since has incrementally bloated it to the point that we now have a tax code something like ten times the length of all the Harry Potter novels combined.

And so what Dominic Cummings refers to as “the blob” distends.

Our tax code is ridiculously long and getting longer

Here’s a graphic I used in a show at the Edinburgh Festival in 2016. After three years of Philip Hammond and two of Rishi Sunak, I’m sorry to report that that red bar is now that much bigger – while the others remain the same.

Right – that’s today’s rant off my chest. Sorry about that. I hope you don’t mind indulging me.

I wanted to talk about sterling today, the Great British Pound. As regular readers will know, there is a cycle that I have observed, a long-term cycle, and, given the state of the world, and of British finances in particular, I thought it is worth checking back in on.

I’m going to start with a three-year chart to get you up to scratch with the recent action. Here it is. “Cable” – that is to say, the pound versus the dollar.

You can see the collapse in 2020 with the coronavirus panic to $1.15; the subsequent bull market, which lasted over a year, topping at $1.42 last summer; and the declines that have followed.

Currently we sit at $1.32 – 10c off the high – and we are in an entrenched downtrend that looks rather like an expanding funnel. The pattern-recognition people would call this a descending, broadening wedge.

This is symptomatic of a leadership that has chosen the Brussels-on-Thames route, rather than the more business-friendly Singapore-on-Thames option.

Assuming that wedge keeps its shape, the projected short-term action would be a rally to the $1.35 area, followed by further declines.

I want now to put this in the context of my longer-term cycle, dubbed, as keener readers will remember, Frisby’s Flux.

The Frisby Flux strikes back

Let me issue the usual disclaimer: cycles are arbitrary patterns put on past events, usually by academics. Real life in real time is often a very different matter. Nevertheless, they can help give you an idea of where we are in the grand scheme of things.

My observation is that every eight years, after a major bear market, the pound hits a tradable low.

We start with 1976, the year of the IMF (International Monetary Fund) crisis. At one point inflation reached 24%. The Labour government borrowed $3.9bn, at the time the largest loan ever requested. From high to low, sterling lost around 40%, reaching $1.60.

But it recovered – by the early 1980s sterling was back above $2.40.

Then came the next bear phase, in which the pound would drop by more than 55% and reach an all-time low against the dollar – $1.04. This was the era of the Falklands War and then the miners’ strike.

But on the other side of the trade, the US dollar was showing extraordinary strength – so much so that France, Germany, Japan, the US and the UK eventually colluded to depreciate it. This was the Plaza Accord of 1985. Again sterling would recover – this time to $2.

In 1992, sterling hit another marked low. This was Black Wednesday, when the Bank of England took the UK out of the European Exchange Rate Mechanism (ERM). It fell from $2 to $1.40 – a 30% loss. The killing that George Soros made selling the pound sealed his reputation.

Eight years later, around 2000, as the dotcom bubble collapsed, so the pound lost 20% of its value. Again it recovered: by 2007 it was above $2.10. Can you imagine? The pound above two bucks only 15 years ago.

Then we got the financial crisis of 2008 and the pound lost 35%, hitting a low of $1.36.

The next low came in 2016 with the infamous Flash Crash of 2016, shortly after Theresa May’s speech at the Conservative Party Conference. Having been above $1.70 at one point earlier in this cycle, it hit a low of $1.14, according to some measures. The overall drop from high to low was almost 35%.

The subsequent bull market was about the limpest in living memory – I expected much more. The 2016 low was retested in the coronavirus panic, and then we got that rally above $1.40 which peaked in August.

To cut to the chase – by 2025 the pound will go to parity with the US dollar

Here’s the illustration of everything I’ve just described. Don’t you love charts? They get to the point much quicker.

Now the big question is: was that high at $1.42 last summer the high? Well, in previous articles on this subject I’ve often said we should be looking to get short on strength in the 2022-2023 time frame. So last summer is perhaps a bit early.

And it’s worth noting that the pound trades in line with financial assets – no surprise given how geared our economy is to finance – so when you get stockmarket panics (eg 2008 and 2020) the pound always takes a hit.

The stage is certainly set for another market decline – international conflict; out-of-control inflation; weak, strategy-free leadership; jittery markets – but these circumstances are not unique to the UK. Are we that much weaker than our competitors? I’m not sure.

I would hope for one last hurrah before the declines, but they may already have begun.

Hold on to your gold and your bitcoins! You’ll be glad of them.

By the way, gold might have been a rubbish asset through the past decade, if you measure it in US dollars. But sterling owners of gold will have a very different perspective.

I predict that by 2025 sterling will have hit parity with the US dollar.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.

Turkey has found a “sticking plaster” for its currency woes, says Lex in the Financial Times. The country is facing a mounting currency crisis and locals have responded by shifting their savings into other currencies and gold (nearly two-thirds of Turkish bank deposits are held in foreign currencies). So Recep Tayyip Erdogan, the country’s autocratic president, last month announced the government will guarantee lira deposits against further deterioration in the exchange rate. The scheme, designed to encourage Turks to keep their savings in lira, seems to have worked so far – the currency has since rallied 26%. Yet few international investors are convinced by the idea.

The guarantee means that if the lira lost 30% against the dollar in a year, then a saver with an account paying the 14% base rate would be topped up with the 16% difference by the Turkish state, says The Economist. The move may have prevented a bank run, but in the long-term it only worsens the economic danger. If the lira falls again then the deposit scheme would leave the Turkish treasury “on the hook for hundreds of billions of lira”. A currency crisis could quickly turn into a fiscal headache.

Turkey’s last lira crisis in 2018 was driven by foreign investors fleeing the country. This time, the problem has been domestic capital flight, says Jon Sindreu in The Wall Street Journal. Inflation is soaring and interest rates should rise, yet Erdogan has forced the central bank to cut four times instead. The deposit insurance scheme amounts to a “backdoor” hike, but instead of raising costs on borrowers it is Turkey’s taxpayers who are now “footing the bill”. If the fiscal costs prove unbearable then the banking system, which holds “about a third of the government’s debt”, could be in trouble. “Turkey’s plan to save the lira is a risky bluff”.

We are at an inflection point in an enormous financial cycle, a cycle that takes a hundred years to turn full circle – the hundred-year cycle of money.

This cycle marked the beginning of the gold standard, the end of the gold standard, the beginning of the fiat standard and – perhaps – now its end, as we see the emergence of a new standard – the crypto standard.

Read on and I shall explain.

Cycles are seductive, which is why they’re so dangerous

Many dismiss cycles work as little more than market gibberish. I have a great deal of sympathy with that view; it’s easy to look at past events, find an arbitrary pattern to fit them – perhaps even stretch events slightly to suit the pattern – and call it a ‘cycle’.

They’re easy to write about, and, because of the shortcomings of the human brain, where we seem determined to believe that some higher power is at work, they make for compelling narratives. Before you know it, you’re peddling a newsletter.

So often, as soon as I hear the word “cycle”, I try to erect a defensive mental barrier. I want as little of that stuff as possible in my head. Cycles are all very well in hindsight, but, in real time, trading or investing on the basis of a cycle is a very different prospect.

I’ve seen people – indeed I’ve done it myself – get so wedded to the idea that some cycle is in motion that you end up ignoring what is actually happening in the world about you. House prices are going to fall because of where we are in the 14-year property cycle. Well, no. They’re going up. Anyone can see that.

At the same time, there are cycles turning around us all the time. From the moon, to the seasons of the year to the cycle of life – what Shakespeare called the “seven ages of man”.

In financial markets there are hype cycles, Kondratiev waves, the aforementioned 14-year cycle in real estate, the four-year “presidential cycle” in US stocks, the seven-year crash cycle, commodity super-cycles, demographics cycles – and Lord knows what else. Heck, what are bull markets and bear markets – good times and bad times – if not cycles?

So, with that rather lengthy disclaimer in mind, let us turn our attention to the 100-year cycle of money. By the way, this is a cycle I have observed – it’s not an “official” cycle.

A brief history of money and technology

Money is technology. What we use as money is often determined by the technology available at the time – usually communications technology.

The first money sent across the Atlantic was sent by boat – Vikings or Basque fishermen or aboard the ships of Christopher Columbus. But it was the successful laying of a transatlantic cable in the mid-19th century that enabled money to be sent by wire. Not actual gold or silver or paper, just a message between two trusted third parties – a record of debt.

That message took several hours to cross. Today with digital technology it is instantaneous – although traditional banking’s processing of that message can take several days. Which is why cryptocurrency, which only takes a few seconds, is so much better for international payments.

The clay tokens that represented measures of sheep or barley, which were used to record debts in ancient Mesopotamia, morphed into the first hieroglyphs and eventually into handwriting. This was just ancient communications technology.

Coinage must be one of the most successful technologies ever invented, given that, almost 3,000 years after the first coins were invented in ancient Lydia, we are still using them today. But even coinage, it could be argued, is a form of communication. With the head of the ruler, coins were a form of propaganda, as well as a form of certification of weight and metal purity.

Gutenberg’s invention of the printing press in the mid-15th century (by the way, Gutenberg was also a goldsmith) enabled a more efficient way to record debts than hand-written notes. By the early to mid-1600s, even here in the UK, written promises to pay – which the Bank of England calls “running cash notes” – were in use. The Bank of England has hand-written cheques in its collection from the mid-1600s, and after the bank was formed in 1694, its notes were formally printed.

National finances at the time were a mess. We had just had the Glorious Revolution after decades of civil war, the lucrative Hearth Tax had been abolished, and King William III was involved in various expensive overseas conflicts. The Bank of England was formed with this in mind, to help raise the money the crown needed.

There was a run on British silver – it was worth more melted down as bullion on the continent that at its face value in the UK – counterfeit coins were rampant, and the great scientist Isaac Newton was called in to the bank in 1696 to oversee the Great Recoinage. Newton would eventually become Master of the Mint, a position he held till his death in 1727.

In 1717, his report “On the State of the Gold and Silver Coin” fixed the value of the guinea and effectively put the UK on a gold standard. It was perhaps an accidental gold standard: he had set the price of silver too low, causing it effectively to go out of circulation. The guinea was a quarter ounce of gold; one pound sterling, fixed at twenty-one shillings of silver.

So that is our first marker in this one hundred-year cycle: 1717.

We’re at another turning point – you should prepare accordingly

At the end of the 18th century, Prime Minister William Pitt’s policy of sending gold abroad to fund Napoleon’s enemies on the continent – known as the “Cavalry of St George”, because of the image of St George on the coins – resulted in a shortage of gold at home. Then the cost of the war saw the UK abandon the backing of gold to its paper money and, around the turn of the 19th century, inflation ran wild.

As the war ended, we got another Great Recoinage – this one in 1816 – to restabilise currency. The first “pound coin” was struck – the gold sovereign – at just under a quarter of an ounce of gold. This currency of the British Empire would last another 100 years.

It was another expensive war that saw its demise – the Great War, World War I. In 1914 the sovereign quickly vanished from circulation as the UK abandoned the gold standard to free up the printers and debase its money to pay for the conflict. And so began the fiat standard.

Here we are, just over 100 years on, in another period of monetary experimentation, printing and debasement. Overseas conflicts have been a huge drain on the resources of the world’s major superpower, no longer Britain, but the US.

Its military is a vast expense. There were (and still are) the wars on terror and on drugs, then the Global Financial Crisis and mass bailouts. Interest rates are being suppressed. We have this newfangled quantitative easing (QE). The idea of modern monetary theory (MMT) is prevalent.

Globalisation and improved productivity masked inflation, though we certainly saw it in property and asset prices. Supply chain failures and labour shortages now mean that inflation is much more apparent and harder to conceal.

In reaction to it all, Satoshi Nakamoto devised his blockchain and we got bitcoin, which has spread to the mainstream, so much so that central banks are now evolving their own programmable money, CBDCs. Crypto-money is the latest evolution in technology.

Will the world embrace the next stage of QE, the ultra-loose MMT of central banks? Or will inflation be such that it embraces some kind of hard-money standard, perhaps based on gold, which central banks own, or on cryptographic computer power (which they have little control over)? Or will it be a bit of everything?

As I say, we are at an inflection point in the hundred-year cycle of money. Money is technology. I urge you to have some exposure to this latest evolution.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookshops, with the audiobook, read by Dominic, on Audible and elsewhere.

Turkey is heading for “a vicious cycle of inflation and depreciation”, Timothy Ash of BlueBay Asset Management tells Tommy Stubbington in the Financial Times. With inflation running at 19.89% and the Turkish lira plummeting, there is talk of a new currency crisis.

The lira has lost 40% of its value so far this year. As of Tuesday it had recorded 11 successive record lows against the dollar in as many days, say Daren Butler and Nevzat Devranoglu on Reuters.

Back to 2018

The latest sell-off came after the central bank cut interest rates to 15%, the third cut since September. Interest-rate cuts reduce the attractiveness of lira-denominated assets, causing investors to sell them in favour of other currencies. At the new interest rate, savings in a Turkish bank account would earn a real return of -4.89%.

President Recep Tayyip Erdogan continues to believe that high interest rates cause inflation, despite ample evidence – not only in his own country – that the opposite is true. He has fired central bankers who didn’t toe the line on easy money.

Things are starting to look a lot like 2018 again, when the lira “dropped precipitously amid a crisis in relations with the US”, say Jared Malsin and Patricia Kowsmann in The Wall Street Journal.

A plunging currency is “driving up the cost of [imported] food, medicine and other essentials for average Turks”. Some commentators fear a bank run. Yet despite growing signs of discontent, Erdogan appears determined to stay the course; indeed “he has intensified his calls for low interest rates”.

Things got so bad in 2018 that policymakers were eventually forced to reverse course with emergency interest-rate hikes, says Craig Mellow in Barron’s. That sent local stocks up by “a third in four months”. Yet few are betting on a repeat this time.

Since 2018, “Erdogan has replaced professionals at the central bank with yes men”. Global inflationary pressures are amplifying domestic problems, while Covid-19 continues to weigh on the important tourist sector.

Emerging markets disappoint

Trouble in one emerging market can quickly spread to others, says Shilan Shah of Capital Economics. Investors in the asset class may panic and sell indiscriminately. Yet any such “financial contagion” is likely to be “much more limited” this time than in 2018.

Turkey aside, most big emerging countries appear to have the foreign-exchange reserves they need to ride out any turmoil. What’s more, non-residents’ holdings of Turkish stocks and government bonds are down by two-thirds since 2018. Foreign investors won’t be panicking and pulling funds from Turkey – most of them have already left.

This was supposed to be a good year for emerging markets as “broad global reflation” took hold, says John Authers on Bloomberg.

Instead, the MSCI Emerging Markets index has flatlined while developed markets power ahead. Collectively, stocks in the Bric countries (Brazil, Russia, India and China) are “still below the peak set on Halloween 2007”.

During the profitable first decade of this century investors used to argue that emerging markets would grow even if the developed world sagged, a concept known as “decoupling”.

Decoupling – but lagging

Since 2011 they have decoupled alright – but in a bad way: they have done much worse than the rich world. Risk-hungry investors used to bet on developing countries. “These days, they prefer developed markets, however good their risk appetite is.”

Much of the underperformance this year comes from China, where a crackdown on tech firms and a property slump have weighed on stocks, says Udith Sikand of Gavekal Research.

Chinese shares account for one-third of the MSCI Emerging Markets index. If you strip out Chinese equities, the rest of the index has gained a 10% this year (although developed markets have done better).

While financial commentators focus on “Turkey’s Canute-like efforts” to defy economic logic, most emerging countries are much more responsibly run and many look “undervalued”.

Investors live dangerously

The rise of Asian mega-caps means that a typical emerging-market tracker now resembles an emerging Asia one, says Cherry Reynard in the Investors’ Chronicle.

“About three-quarters of MSCI Emerging Markets index’s capitalisation [is] made up of Asian giants China, Taiwan, South Korea and India.” Just 4.5% is Brazilian shares. With Chinese growth ebbing, asset managers are starting to “reappraise their weightings” and look for opportunity elsewhere.

One asset manager tells Reynard that Russian valuations are attractive and offer exposure to higher commodity prices. Another has bought South African equities, citing “strong growth at extremely cheap valuations”.

Some bets are even riskier. Sikand thinks growth could eclipse forecasts in Brazil because of strong commodity exports, but admits that a soaring fiscal deficit and a contentious election next year mean that Brazilian bargain hunters will be “living dangerously”.

After such a torrid year there are bargains in emerging markets. But investors will need a hearty risk-appetite to take advantage.

There has been a fundamental shift in the investment landscape, a shift that has meant making money these past few months has become that much harder.

It explains the slowdown in commodities, the general choppiness and lack of clear trend elsewhere. It perhaps also explains some of the price action we have seen in bitcoin and ethereum.

I am talking, of course, about the US dollar – it’s going up.

The US dollar is on the comeback trail

The change in trend can be traced back to the end of May. Your intrepid author, like the most hawk-eyed and investigative of journalists, was on the case: “Everything hinges on the direction of the US dollar” we declared, and today we look at our portfolios, and at what we wrote, and wonder why we didn’t listen.

The US had reached one of those important inflection points. If it had broken below 88-89, then we would be in crack-up boom territory, and we would see most assets rising ballistically. But if 88-89 on the index held, the party would probably be over.

Unfortunately, it held.

So let’s take a look at the offending chart. It shows the US dollar against a basket of the currencies of its major trading partners (the euro, the yen, etc) over the last six years.

There are two or three observations to make about this most important of prices.

First, the clear range in which it is trading: 103 marks the top of the range and 88-89 the bottom. That number, 103, is a significant price point; the dollar peaked at 103 at the height of the Corona Panic in March 2020, and it peaked there in 2017 at the end of Barack Obama’s presidency and at the beginning of Donald Trump’s.

We hit the bottom of the range after the money printing bonanza of 2020. We re-tested that level six months later – and it held. We got a textbook “W bottom” and since then the US dollar has been in a bull market.

The 88-89 level also marked the bottom of that range back in winter 2018 after Trump’s first year.

We are now in the middle of the range, but the current trajectory is sharply up. Going forward, we can probably expect some sharp moves in both directions – just to make everybody’s life difficult – but with the broader general direction being higher.

“How can it be in a bull market with all the money they’re printing?” you may ask. Well, everybody else is printing more, I guess is the answer.

The obvious target is 100 and, on the current trajectory, we will probably get there some time next year.

We may even see 103 in the event of some kind of extreme event.

Sterling takes a beating, helped by its hapless steward

The price action of the US dollar, I suppose the largest market in the world, explains capital flows and thus the price action of so many other assets. Sterling, for example, has been hopeless since June, sliding from 1.43 to 1.34.

The hapless Bank of England has much to answer for here. CPI, the current measure of inflation, is at a ten-year high of 4.2%. The Bank of England meanwhile says that inflation is transitory and keeps rates on hold.

CPI was arguably only introduced as it made inflation look as if it was lower than under the previously-used measure RPIX which, as John Stepek pointed out on Twitter this morning, is now at a 30-year high – RPIX (retail prices excluding mortgage interest costs) is now at 6.1%. It was 6.2% in August 1991.

If the base rate reflected actual inflation, oof, there would be carnage. So the Bank of England won’t ever allow that to happen – at least not voluntarily.

Nevertheless US dollar strength or weakness is the far greater determinant of cable (the US dollar vs sterling exchange rate) than is action, or lack of it, by the Bank of England, because the former is a far bigger market. Anyway, I digress.

Gold is doing something rather unusual

The rising US dollar also explains the relative underperformance of gold and silver. Precious metals go up when the dollar is weak, and vice versa. Everybody knows that.

Yes, but, no, but – they don’t always; there are exceptions, and we seem to be in one of those exception periods now. From August 2018 through to the corona panic of March 2020, gold actually rose in tandem with the US dollar, albeit from extremely oversold levels ($1,200 gold). In the second half of 2020 gold fell as the US dollar fell.

In 2021 normal service resumed. Gold fell as the dollar rose. It rose as the dollar fell. But since early September, the two have been rising together. I’m not quite sure what to make of it yet, but broadly speaking a gold price that is rising as the US dollar is rising is, I’d say, a good sign for gold investors.

The easy profits of 2020, when everything went up as money was printed, are behind us. Thanks to a rising dollar, the investment landscape has changed. It’s got harder. We need to be more selective. Markets are choppier.

This might even be one of those rare times when gold miners do well. Nevertheless, onwards we trudge.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Today’s missive is not so much of the “urgent, act now” variety.

Rather it’s a “keep an eye out for this one over the next year or so”.

That doesn’t make it any less important. There just isn’t quite the same urgency to be reaching for the sell button.

So we are talking sterling today - the Great British pound. Specifically, Frisby’s Flux - a long-term cycle I have identified in the pound that, periodically, I come back to.

The fundamental observation is this. If you look at cable (the pound vs the US dollar) over the last 50 years, you will notice that it has displayed a regular, repeating pattern - a cycle.

So what is that cycle?

Sterling’s repeating cycle

Every eight years it sells off to a major low. The last one came in 2016 - shortly after Theresa May's speech at the Conservative Party Conference when she infamously lost her voice. It was dubbed the Flash Crash.

That means a year or two earlier, you want to be reaching towards the sell button. According to this cycle, the next major low comes in 2024.

I last covered this subject in 2019, advising that “come say 2021 or 2022 we should be looking to go short again with the eventual low targeted some time in 2024”. That’s why I bring this up today. Over the next year, perhaps, we should see a major high and use the opportunity to offload. In fact, it’s possible we have already seen the high.

If this all sounds a little bit Mystic Meg, that’s because it is. Getting wedded to the idea of an inevitable cycle never made anyone rich. In fact, such a practice can lead to bad decisions. There are cycles in markets, just as there are cycles in life, but they don’t always adhere to the calendar. It’s all too easy to look back at history, find some arbitrary pattern, and declare it a cycle. Harder to actually manage it in real time.

I would say that cycles are more something to have at the back of your mind, while investing, rather than at the front. But they can still help you gauge where you are in the grand scheme of things.

Sterling has collapsed due to a number of events

So, if you cast your eye over the chart below of the pound vs the dollar since 1970, you will note that every eight years the pound makes a significant low.

The major news events that accompanied these lows were as follows.

1976 was the year of the IMF (International Monetary Fund) crisis. At one point inflation reached 24% - there were no cheap imported goods from China to hide behind back then. Dennis Healey, the Labour Chancellor, went cap in hand to the IMF and borrowed US$3.9bn, at the time the largest loan ever requested. From high to low, sterling lost around 40%.

But it recovered. By the early 1980s sterling was back above $2.40. Then came the miners’ strike, the Falklands War and, probably more significantly in forex terms, the Plaza Accord. The pound lost 55% - by forex standards one heck of a drop. The US dollar was extraordinarily strong - so much so that France, Germany, Japan, the US and the UK colluded to depreciate it with the Plaza Accord of 1985.

But again sterling would recover. By the early 1990s it was back above $2.

But, as night follows day (almost) we got another sell-off in 1992. Black Wednesday, when the Bank of England took the UK out of the European Exchange Rate Mechanism (ERM) and George Soros famously made the killing selling the pound that would seal his reputation. The pound went from $2 to $1.40 for a 30% loss.

Again it rallied, only to sell-off eight years later in 2000-01 with the dotcom collapse. There was another rally. By 2007 the pound was north of $2.10.

Then we got the financial crisis of 2008 and the pound lost 35%, hitting a low of $1.36.

It rallied. Then came Brexit, the incompetent handling of it, and the subsequent sell-off in the autum of 2016 to around $1.12 (this figure varies according to different data feeds).

Those 2016 lows were re-tested in 2018 and since then the pound has rallied, albeit anaemically, to above $1.43.

Today we sit around $1.37.

Have we already seen the highs for this part of the cycle? It’s possible. There’s a lot of resistance in the low $1.40s, for sure. The pound will really struggle to get above there, unless there is some kind of overriding weakness in the US dollar.

But if this cycle remains true then we should be looking for new lows in sterling come 2024.

How to play this?

You can sell sterling in the forex markets and buy the dollar. Or buy non-sterling denominated assets - gold, bitcoin, foreign stocks, foreign real estate, foreign bonds.

Come the declines of 2024 you buy Britain again.

There are a lot of reasons to go against this logic, not least that, on a relative basis, the UK is cheap - at least its companies and its currency are. So any sell off would come from cheap levels, not the lofty heights above $2 whence many previous declines have emanated.

As I say, don’t get too wedded to cycles. They are just a useful tool to have at the back of your mind.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

“Will the fall of Kabul now bury belief in a world led by the US as its sole superpower?”, asks Louis-Vincent Gave of Gavekal Research. Can “US military prestige survive a defeat at the hands of untrained farmers driving Toyota pickups?”

The US has bounced back from military disaster before. But events in Kabul could come to mirror Suez. Declining US prestige is bullish for gold (the ultimate safe haven) and oil (because of the risk of “heightened tensions in the Middle East”). It is also “bullish for the renminbi… as China is the rising power in Asia”. Above all, it could prove “bearish for the US dollar”.

The US dollar is the world’s leading reserve currency. Investors turn to US assets as a safe haven in times of turmoil. Worries that the Delta variant will hurt global growth have thus given the greenback a boost of late. The US dollar index, which tracks the currency’s value against a basket of six major trading partners’ currencies, has gained 3.5% this year.

Journalists sometimes say they are surprised that US failures don’t have a more negative effect on the dollar, says Robert Armstrong in the Financial Times. “I’m always surprised US stocks don’t go up more.” US disasters make the world more dangerous; “when the world is more dangerous, the place to be is American assets”.

The outlook isn’t necessarily bearish, says William Watts for MarketWatch. Some say America’s departure from Afghanistan frees it up to focus on its traditional allies. Ultimately there are few alternatives to the dollar. China’s renminbi faces formidable hurdles to becoming a safe-haven currency. The dollar’s biggest rival is the euro, but for now the “euro-denominated debt market isn’t… of the size and liquidity needed to meet the needs of global investors”.

We have been watching the US dollar intently on these pages for many months now, and urgently reporting on developments when and if they occur.

Today sees one such dispatch.

Over the past few days the US dollar has done one of its sudden about-turns.

What had seemed like an upward thrust, threatening to kill the likes of gold and silver stone dead, has suddenly reversed and the run that began in May now seems to be running out of steam.

A weak dollar sent asset prices soaring

In many ways the US dollar is the single most important price in the world. The dollar is, of course, the global reserve currency. Vital commodities from oil to copper to wheat – energy, metal and food, in other words – are traded in US dollars.

It is a determinant of international capital flows: is money flowing from or to the United States?

A strong US dollar is in some ways good for international stability. It is good for America’s reputation. But a weak dollar enables it to print and spend, and boy does America like printing and spending.

When the dollar is weak, asset prices rise – and the world sure does love a bit of asset-price inflation. Borrowing is cheap, house prices go up, stock prices go up, bond prices go up, energy and metal prices go up. The party keeps on rocking.

When the dollar is strong, an international sense of the jitters ensues and the world worries that the asset price inflation party that has been going on since 15 August, 1971, might be coming to an end.

If you like a bit of asset price inflation, the year from April 2020 was one heck of a party – one that few of the revellers will ever forget, despite the amount of cheap money intoxicants that got consumed.

You might have thought that shutting down economies and a global pandemic might be bad for business. But the money printers gave us a year few of us will ever forget. Was there anything that didn’t go up in price? Steel, stocks, crypto, precious metals, energy; heck, even the price of labour went up. Even the cost of houses in now deserted city centres. It was a bonanza time for all. The S&P500 doubled.

I’m not even sure where the biggest party of the lot took place. It might have been lumber, it might have been some stupid cryptocurrency that nobody born before 1993 has ever heard of.

The party comes to a sudden stop

But then in May, the Feds came along and shut down the sound system. Go home, they said, and revellers staggered towards the nightbus with their new found riches. Did they really get rich? Or did stuff just get more expensive? And the value of their money go down?

We wizened observers think it was the latter. There are some that got rich; the clever ones with access to lots of cheap capital. Most think they got rich because their house went up a bit, but really, they just kept up. Those with no capital? They just fell further behind. Wealth inequality just got that bit worse.

Oxfam will print some numbers about it in a year or two. Everyone will get outraged, especially the clever ones with access to cheap capital. And the printing presses will keep on whirring.

But anyway – back to last May. All in all, over the course of the party, the US dollar index fell from 104 in March 2020 to 89 by the beginning of 2021. That’s a decline of around 14% – a lot for a currency.

I’d say, at a guess, financially speaking, the developed world got at least 14% less equal.

Then the US dollar suddenly rallied. Ooops. It got to 93. Party’s over.

No, it isn’t – in April it fell again. The asset price party’s back on. It slid all the way into May, and then we got another rally.

This time the rally had a stronger footing. There’s a double bottom – a really strong base there. This rally could have legs – and it did. We marched straight back to 93.

This could go all the way to the mid-to-high 90s, we felt. The heat came off commodities. The heat came off crypto. The heat never comes off US stocks!

But this week we got a wobble. Looks like we’re headed lower again. The selling pressure on precious metals and crypto in particular has abated. We’re now at 92, and 91 looks a given.

Do we go all the way back to 89?

I’m not so sure. I don’t mean to spoil the party, but this looks more like a pull back in a bull market to me.

I hope it isn’t, of course. I’m revelling in the asset-price party just as much as the rest of you.

The big story now, as far as I’m concerned, is that the US dollar is in a bull market.

As a “sound money” advocate, I would prefer it were not so. Gold, miners, bitcoin – they all do better when the dollar is falling. Our anti-fiat-money biases are confirmed when the dollar is falling.

“Look, the Fed is printing money”, we can say, “and look at the resulting loss in purchasing power.”

The Fed is printing money. And fiat money is losing its purchasing power, especially against debt-based financial instruments. Such as houses.

But let us not gloss over the fact that the US dollar has made a clear bottom. To do so would be to delude ourselves. The US dollar is now rising. It is in something of a bull market. And there are investment implications to that.

The US dollar’s double bottom

Starting with the US dollar index, which is the dollar versus a basket of the currencies of its major trading partners (the euro, the pound, the yen, Canadian dollar and so on), here is the offending chart – as textbook a “W bottom” as you will ever see.

Those forex traders who trade by patterns will be all over this, and those who follow trends will be starting to join them. The implication is that it goes higher – probably to the high 90s (this is an 18-month chart, by the way).

Note that the May low for the US dollar was slightly higher than the January low – the right hand side of the W (the double bottom) – is slightly higher than the left. The pattern guys will be loving that.

We have been warning for some time on these pages about the 89 area on the US dollar index. If it doesn’t hold, then the dollar probably goes to the low 80s, maybe lower. Gold goes to $2,500 an ounce or more, bitcoin to $100,000, oil goes to $150 a barrel, and metals go to the planets – the moon, Jupiter, Mars et al – whence they came.

However, if that 89 area holds, then the inflationary trend of the last year or so that we’ve seen in commodities comes to an abrupt halt. That 89 area has held.

And meanwhile, the bull market in commodities has – oil aside – come to a juddering halt. Precious metals, base metals, softs and grains – they are all now in intermediate downtrends.

The yen, the euro, the pound and the Canadian dollar have all turned down too.

The trend is your friend. Don’t ignore it.

Oil is laughing in the face of the stronger dollar

One inflationary asset is not having it, however: oil. Rising US dollar or not, oil is grinding higher. It is in a bull market. Be long oil.

Oil demand is rising. We keep banging the drum about it on these pages. The green energy revolution needs a lot of oil to make it happen. Meanwhile, government policy dramatically disincentivises investment in oil exploration and development. What’s the result? Higher oil prices. Everybody pays. The poor are hit hardest.

Let’s spell it out in case there’s any doubt: the green energy revolution is driving the oil price higher. Government policy is driving the oil price higher. We are in the realm of unintended consequences, where government policy reigns supreme.

When oil goes above $100 – next year, probably – “greedy oil companies” will get the blame. The fault lies with deluded policy.

But back to the focus of today’s Money Morning – Uncle Sam’s currency. Now we zoom out and consider a longer term chart. This is the US dollar index over the last ten years. And we note, in the blue shaded area, that support zone at 88-89 was also visited in 2018. And that a much longer-term W could be forming (as drawn in red).

Is this something to be concerned about?

Possibly. The pattern recognition purists will say that a classic double bottom needs to come at the end of a downtrend. This multi-year double bottom came after an uptrend. That doesn’t rule out the scenario that this a multi-year W, but it is not as clear-cut as the shorter-term pattern with which we began this article.

In fact, more clean-cut is the double top – the “M” top around 104 – which heralds lower prices.

Ah, technical analysis is in the eye of the beholder.

A more likely scenario over the longer term perhaps is that we range trade. Perhaps we get runaway inflation and commodity prices in non-US-dollar currencies, while the US dollar sees an influx.

Impossible to know. But in the shorter term – and by that I mean the next few months – it looks like the US dollar wants to go up.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

State-backed digital currencies are often touted as the “future of money”, with several economies at least discussing their adoption, driven partly by concerns about competition from private cryptocurrencies.

Central bank digital currencies (CBDCs) are a virtual form of fiat currency issued and regulated by the central bank of a country. Although both cryptocurrencies and CBDCs lack physical presence, the former are decentralised and backed by blockchain technology, whereas the latter remain under the control of the central bank.

Earlier this month, the House of Lords was less than supportive of the idea that the UK should have an official digital currency. The Economic Affairs Committee cited financial stability challenges and protection of privacy as serious concerns.

However, other countries are more open to the idea. According to the US think tank Atlantic Council, nine countries around the world including the Bahamas, Nigeria, and seven eastern Caribbean nations, have so far launched their own CBDCs with China, UAE, Sweden, Thailand in their pilot phase.

Another16 countries are in the development phase, with another 41 – including the UK – researching whether it’ll be worth it.

So, how are other economies faring so far when it comes to launching their own digital payment instruments?

India

In December last year, the Reserve Bank of India (India’s central bank) said it was mulling the introduction of a “basic” CBDC before moving to a more sophisticated version to ensure minimal impact on monetary policy. This comes as the Cryptocurrency and Regulation of Official Digital Currency Bill (2021) awaits consideration in the parliament, seeking to regulate crypto assets and possibly banning their use as a method of payment.

So while the central bank opposes the idea of owning cryptocurrencies, it is exploring its own digital currencies simultaneously. The coming week will see India’s finance minister unveiling the budget for 2022-2023 which could see the introduction of taxes on cryptocurrency trading and its regulation by the government securities body.

The US

Of the countries or regions with the four largest central banks – the US, the eurozone, Japan, and the UK, the US is furthest behind when it comes to launching a CBDC – Federal Reserve chair Jerome Powell has previously said that he would “rather do it right than do it fast”, although he has also argued that cryptocurrencies and CBDCs could co-exist, and reiterated that the US has no intention to ban cryptocurrencies.

A recent report from the Fed on a digital dollar also made it clear that while the Fed sees both pros (speedier transactions) and cons (threats to both privacy and potentially financial stability), it has no intention of launching a CBDC without the backing of US politicians.

That said, research goes on – recently, the Federal Reserve Bank of Boston announced that it was looking for a new director to steer its CBDC pilot programme, which will explore the tech, benefits, and trade-offs of a digital dollar while better understanding existing digital currency options in conjunction with researchers from MIT.

But there is clearly widespread awareness of the potential powers a CBDC could give to the central bank and the government. US politician Tom Emmer has introduced legislation that would effectively prohibit the Fed from launching its own CBDC to consumers, due to concerns that it might be used as a surveillance tool.

China

While the adoption of CBDCs seems to be moving at a sluggish pace around the globe, the Chinese central bank, the People’s Bank of China, is upping its game to launch its own digital currency (e-CNY). Reports suggest that pilot schemes for a “digital yuan” have already surpassed $1bn-worth of transactions and the latest vote of confidence came when WeChat, China’s largest messaging app service and payment platform, announced that it would accept it as a form of payment. The Chinese government meanwhile has banned private cryptocurrencies.

The bigger picture

Two main things are clear from the pace of progress so far. One is that governments and central banks are not keen to lose control over currencies to independent cryptocurrencies, and are simultaneously excited about their potential for conducting monetary policy (and in some cases, controlling the population).

So far, those who are furthest along the road to CBDCs are either those with the most interest in social control or those with weaker, non-reserve currencies. It could be argued that reserve currency countries (such the US and, to a much lesser extent, the UK) are perhaps complacent, but equally, they probably see more potential for disruption and less potential for benefit.

The other clear point is that interest is growing. Globally, 87 countries representing over 90% of global GDP are currently exploring a CBDC. In May 2020, only 35 were considering it. While the Bank of England has stated that a UK CBDC – or what’s popularly called ‘Britcoin’ – might not arrive till 2025, countries such as the Bahamas and Nigeria have already launched the Sand Dollar and e-Naira respectively.

For more on cryptocurrencies generally, here’s our guide to bitcoin.

Don’t bet against Uncle Sam. Market analysts were sure of one thing at the start of 2021: the dollar was due a fall. A strong global recovery, combined with fears of government overspending in Washington, meant investors were expected to swap their greenbacks for a more colourful collection of international currencies. Instead, the US dollar index, which measures the currency’s value against a basket of six major trading partners’ currencies, has gained 2.3% so far this year.

The greenback enjoyed its best quarter since 2018 in the first three months of this year, says Eva Szalay in the Financial Times. It gained an impressive 7.2% against the Japanese yen. The dollar’s strength has been driven by higher US Treasury bond yields. The US ten-year yield has risen from 0.9% at the start of the year to 1.65% today. That has made it more attractive relative to bonds in other currencies.

If anything, the real question is why the dollar isn’t even stronger, says Aaron Back in The Wall Street Journal. While the dollar index has gained in 2021, it has actually fallen by 7% over the last 12 months. It seems that investors fear an inflationary sting in the tail. The US Federal Reserve has made clear that it is much more relaxed about inflation than it used to be. Higher inflation means lower purchasing power per unit of currency, so the prospect of a US inflationary surge would be bad for the dollar.

An incipient US boom means the greenback may stay strong in the short-term, say Will Denyer and Tan Kai Xian for Gavekal Research. But while the Biden White House has so far focused on splashing the cash, tax hikes and more regulation are also on the agenda. As the rest of the world catches up with the US recovery, this period of dollar strength should ultimately fade away.

The Turkish lira crashed this morning – falling by as much as 15% against the US dollar at one point – after Turkish president Recep Tayyip Erdogan sacked the central bank governor, Naci Agbal, this weekend.

Last week, the lira had strengthened sharply after Agbal had increased Turkey’s key interest rate by two percentage points to 19%, more than economists had expected. Inflation in Turkey is running at above 15% a year.

Agbal’s move was designed to get ahead of the problem. However, it clearly went against the wishes of Erdogan, who promptly replaced him with Sahap Kavcioglu, a former member of the ruling party.

What caused the slump?

Agbal has only been in the job since November, when he was appointed to help combat inflation. This shot up to eye-watering levels during the country’s debt crisis of 2018, which saw the lira slide by 34% against the dollar, driving up inflation beyond 25% at one point.

The two main drivers of the currency crash were Turkey’s high current account deficit (in other words, more money was going out of than coming into the country, leaving it reliant on foreign investment, which can be very short term) and high levels of private foreign-currency denominated debt (debt denominated in foreign currencies becomes harder to service the weaker the borrower’s currency becomes).

Since Agbal’s appointment as central bank chief, the lira had strengthened in value as both overseas and domestic investors preferred his traditional macroeconomic policies. And his latest rate hike had been applauded by both local and foreign investors as a credible move to tackle inflation.

Indeed, before Monday’s sharp sell-off, the Turkish lira had been one of the highest-flying emerging-market currencies so far this year, “owing in part to Agbal’s long-needed tightening of monetary policy and prudent decision making”, notes Sophie Griffiths, market analyst at OANDA.

However, the rate hike was too much to stomach for Erdogan, a long-time opponent of higher interest rates. Erdogan is of the – shall we say, unusual – opinion that higher interest rates cause inflation, rather than stifling it. Whether this belief is genuine or not, like most politicians, he prefers low interest rates because they tend to make borrowing cheaper and (nominal) growth faster, which tends to be more politically popular.

Thus he has appointed Kavcioglu, a professor of banking at Marmara University, as Agbal’s replacement for the top job. Kavcioglu is known to be more dovish in nature and shares Erdogan’s taste for lower interest rates, according to multiple reports.

Will there be a knock-on effect?

So will the lira’s plunge reverberate across other financial markets? Whenever these sorts of crises arise, investors’ memories tend to hark back to the Asian crisis of 1997, when a currency collapse in Thailand saw a domino effect take hold across the region.

However, so far the risks of “contagion” look fairly small. Although Turkey’s foreign currency debt is eye-watering at $430bn, currently worth 59% of the country’s GDP, most of this money is owed to Turkish businesses and households, notes Udith Sikand, analyst at Gavekal Research. “This gives Ankara considerable room for can-kicking, for example by issuing foreign currency bonds to domestic depositors”, adds Sikand.

This means that for now Turkey can avoid having to introduce capital controls to prevent foreign currency outflows, a scenario which would have prevented foreign banks and businesses from withdrawing their cash – and probably sparked a panic.

The situation is also nowhere near as bad as in 2018, when the European Central Bank warned banks who had exposure to the country about the risk of contagion spreading to other financial markets. Even though Spanish, Italian, French and German banks still have exposure worth $118bn to Turkey, “the European banking sector is not looking too troubled, at least by Turkey, as markets look for improved growth, lower loan losses and steeper yield curves to fatten their profits and increase their ability to pay dividends”, says Russ Mould, investment director at AJ Bell.

So while Turkish assets and the currency are likely to struggle under the new dovish governor – which will only exacerbate Turkey’s inflation problem, as Jason Tuvey, senior emerging markets economist at Capital Economics points out, it doesn’t yet look like this will cause major problems elsewhere.

What does this mean for my money?

Unless you have heavy exposure to Turkish assets (in which case you’ve already been through the mill several times over the last few years), there is no obvious reason to make big changes to your portfolio.

Even on the bond market front, Turkey is not a core holding for most emerging debt funds, says Sikand, pointing out that Turkey represents only a 3.5% weighting in the JP Morgan EMBI Global Diversified Index, a benchmark and total return index for $250bn worth of sovereign debt holdings.

I haven’t covered sterling for a while – partly because I don’t want to jinx it – but I can ignore it no longer. Today we look at the British pound. It is having a good year.

We will start with its performance against the dollar and the euro. But it is the pound against the Japanese yen that I am really interested in. I’ve been studying the price action since the 1990s, and there is quite an exciting observation that I would like to share with you.

The pound has had a solid run, and it looks set to continue

The standard benchmark by which we look at the pound is “cable” – the pound versus the US dollar – so-called after the first transatlantic cables were laid under the Atlantic in the 1860s, enabling the London and New York exchanges to reliably and quickly relay currency prices (one tends to forget the role that communication technology has played in the evolution of money).

Having begun 2021 at $1.35, cable hit a high of $1.42 late last month. But dollar strength of late has seen the pound slide back to $1.39. This is a bull market that began last March, and the recent action seems to be a fairly standard pullback from overbought levels. Historically however, that zone – a couple of cents either side of $1.40 – has been a pivot point of support and resistance, and it will probably be so again.

The pound has had a rip-roaring start to the year against the euro as well, going from €1.10 in January, to touching €1.17 this morning. Longer-term the bull market is not so clear cut, but I would hope to see this above €1.20 later in 2021, with all the usual forecast volatility along the way.

One issue I have with cable however, and to an extent the pound-euro exchange rate, is that forex (foreign exchange) pricing is greatly influenced by the actions taken by the central bank of the larger economic bloc. Utterances by the US Federal Reserve can have a greater effect on the cable price than utterances by the Bank of England. It’s not always the case, of course, but often.

As a result I have a fondness for pairs where relative GDP is closer. That brings me to the pound versus the Japanese yen.

The pound could rise much further against the Japanese yen

Though not so dissimilar in terms of landmass, Japan’s population is roughly twice that of the UK (126 million compared to 63 million) and its GDP is around $5trn, when the UK’s is closer to $3trn. Nevertheless, it will do.

Despite the daily and weekly volatility of forex, in the longer term you will often see broader trends that can go on for many years – ride these and you can make a lot of money. This is very much the case for the pound against the yen.

Below I have posted a monthly pound-yen chart which goes back to 1990. In addition to the price in black, I have plotted the nine and 21-month moving averages in blue and red. These strip out the volatility and show you the broader trend.

You can read about my moving average crosses system here. This is a simple trend-following system that removes the need for any kind of fundamental analysis. In fact, the less knowledge you have about the underlying markets, the better the system works. Your only care is the direction in which a market is trending.

The longer-term changes in trend can be marked by the moving average crosses – when the shorter-term moving average (in this case the nine-week) crosses through the longer-term MA. I have marked these changes in trend with black arrows. You can see that there have been only ten of these major trend changes since 1990 – on average, one every three years in other words. The pound-yen pair can trend for many years in one direction or the other.

From 1990 to 1996 the direction was down. From 96 to 98 it was up. The next three years were down. The bull market from 2000 to 2007 lasted seven years, then we got five years of bear market that took us to 2012. These are long, tradable cycles which mean you don’t have to get involved in daily noise. The four years from 2012 to 2016 saw another bear market. Two years of bull market followed, from 2016 to 2018, and two years of bear market from 2018 to 2020.

These signals are lagging indicators. They don’t mean “run out and buy as soon as you read this”. But they do serve to show you where we are in the grand scheme of things. Until 2016, these signals only occurred once every several years.

The point I want to make is that late in 2020 we got another of these crosses, marking another change in trend from bear to bull market. Look at the past and at how long these cycles can go on for, and you start to get quite excited about the possibilities.

Currently the pound sits at ¥151. It has had a bonanza run from late 2020, as it has against the dollar and the euro, no doubt because there is finally Brexit clarity. I see some resistance at the 2018 highs of ¥156. After that there is a fairly clear run to above ¥190, I’d say.

We tend to have a low opinion of our country because of the endless flow of bad news our media pumps out. But other countries have exactly the same problem of self-esteem, and, perceived from abroad, the UK is not at all a bad place to be. Even after the run it’s had, the pound is only at its 2000 lows. There is a lot of potential upside. It’s not like the Bank of Japan isn’t printing.

So ¥150-¥156 is a resistance area, and I expect some range-trading here. But the short-term trend is up. And the monthly moving averages, as shown above, are signalling that the long-term trend has changed too.

Let’s see where we are in a couple of years.

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“The King is back,” writes Cormac Mullen on Bloomberg. The US dollar was widely tipped to tumble this year, but so far it has proved remarkably resilient. The US dollar index, which measures the greenback’s value against a basket of six major trading partners’ currencies, is up by about 1.2% so far. That wasn’t supposed to happen: Federal Reserve policy is historically loose and global reflation this year should encourage investors to leave their dollar comfort zone and explore opportunities in other currencies. If this continues, then it “will upset quite a few investment strategies”.

The dollar index fell by almost 7% last year, but the greenback still looks overvalued in historical terms. The index is 15% up on the start of 2010. The currency’s strong start to the year is even stranger because it has accompanied robust gains on world stockmarkets. The dollar is regarded as a safe-haven currency, meaning it should underperform when stocks are feeling bullish.

A weaker euro

The dollar’s unexpected pop probably has more to do with the euro, says William Watts on MarketWatch. It is by far the most important comparison currency for the greenback, making up about 58% of the dollar index basket. A slow vaccine rollout is hitting the continent’s growth outlook and thus the euro, which has slipped by 0.8% against the greenback so far this year. The European Central Bank (ECB) will be quite happy about that; it has been fretting that a strong euro could trigger deflation.

Central bankers in emerging markets aren’t betting on the dollar’s bounce continuing, says Shilan Shah for Capital Economics. From India to Poland, they are rolling out new foreign-exchange purchase programmes designed to curb appreciations of their own currencies against the greenback. Chile will buy $12bn, equivalent to 5% of GDP, in an effort to keep its peso cheap. The “echoes” of past “currency wars” are becoming unmistakable.

Despite its strong start to 2021, most analysts think that the dollar’s most likely destination is lower. More than 85% of analysts polled by Reuters expect it to “stay around current levels or decline over the next three months”, reports Hari Kishan. The US Federal Reserve, which says it will keep monetary policy easy even if inflation eclipses 2%, is the key reason the currency looks set to fall. “A lot of the exceptionalism of the dollar has to do with its scarcity,” says Steve Englander of Standard Chartered. There is huge demand for the world’s reserve currency and traditionally limited supply.

Yet with the M2 gauge of US money supply expanding by 24% over the past year, that scarcity is eroding fast; before too long “there will be an abundance”. That should put a lid on the dollar’s mini-rally.

About a year and a half ago, investors were closely watching the Chinese yuan. They were worried that China might let its currency weaken drastically, rattling markets and sparking disinflation across the globe.

Now, the yuan is at its strongest level against the US dollar since mid-2018. Fears of devaluation have evaporated. What’s changed? And why should you care?

The Chinese yuan is at its strongest level in two-and-a-half years

The Chinese currency – the yuan or renminbi – has been steadily strengthening against the US dollar since about May of last year. At the start of 2020, one US dollar would fetch you nearly seven Chinese yuan. Yesterday, the same dollar would get you less than ¥6.5. That’s the strongest the Chinese currency has been since June 2018. This is significant. Not the level particularly, but the fact that the yuan is getting stronger and stronger.

As recently as the middle of 2019, one big “macro” fear (and yes, how laughably naive that fear seems today) was that the yuan would just keep getting weaker against the US currency. Indeed, the level of ¥7 to the US dollar was regarded as a “line in the sand”, monitored with much trepidation by investors. Why?

China is trying to diversify, but it is still a big exporter. One of the biggest disinflationary factors in the world over the past two to three decades has been the presence of China as a major supplier of both labour and goods to the global economy.

Like all economies, China’s authorities face a bit of a juggling act. But that juggling act is made a lot more complicated by the fact that China is an authoritarian state with a lot of central planning. Trade-offs are hard to make when your authority relies partly on giving the impression that everything, everywhere, at all times, is going to plan. So when Chinese economic growth was under pressure amid trade disputes, one view was that the country might allow the yuan to weaken, or even push through a one-off devaluation, hoping the weaker currency would offset any trade barriers and help boost growth.

Any major devaluation of the yuan by the Chinese authorities would have sent a wave of deflation washing across the globe. Given that every central bank in the world is trying to spark inflation, that wouldn't have been welcomed by the authorities anywhere. Also, America probably wouldn’t have been overjoyed, in the midst of a trade war, to see its rival explicitly aiming to get an advantage by weakening its currency.

Anyway, the ¥7 mark drew a lot of attention because the yuan hadn’t been that weak since before the 2008 financial crisis. As it turns out, the “line in the sand” was in fact crossed. And eventually the yuan hit its weakest point in September 2019 at a point where a US dollar fetched almost ¥7.2. It rallied from there, but then the extent of Covid-19 became clear, and it started to weaken again from mid-January last year.

Then of course, Covid-19 went global, and while the yuan continued to weaken until May, by that point China was starting to recover while things were going pear-shaped everywhere else. And since then the yuan has been strengthening very consistently. So what's going on and what does it mean for your money?

What’s pushing the yuan higher?

There are few factors driving the stronger yuan. One is that Chinese assets offer much higher interest rates than US and European ones. That means China is attracting capital which will drive up its currency.

Investors have also noticed that the Chinese authorities – who still closely monitor and manage the currency – don't seem to be too concerned about its current strength. So they're more willing to bet on the currency strengthening still further. This is at least partly driven by China’s desire to deepen the country’s capital markets, which ultimately relies on being an appealing destination for capital, foreign or otherwise.

The other factor is that it’s not just about the yuan getting stronger – the dollar is also getting weaker. That’s partly because of increased risk appetite. As we've pointed out here countless times, all else being equal, a weaker dollar is good news for risk assets in general. In effect, it means that liquidity is plentiful and everyone can get hold of all the dollars they need easily (the US dollar is the global reserve currency, so everyone needs it).

The question is: what does it mean for your money? You can decide whether investing in China is something you want to do. I have my qualms – I think China is less risky than Russia in terms of respect for property rights, but that isn’t saying a great deal. And you only have to look at the slapdown Jack Ma took last year, with the scrapping of the Ant Financial IPO, to understand that when push comes to shove, the Communist party is in charge (yes, America is tiptoeing around Jeff Bezos in a similar manner right now, but both the balance of power and the institutional protections make it an entirely different matter).

That said, some smart people reckon that Chinese sovereign bonds represent a good addition to a portfolio. And there’s no doubt that China has some excellent listed companies. And at the end of the day, if China does harbour ambitions of supplanting the US as reserve currency in the future, then it’s going to struggle to do that without modernising its financial system in a way that shifts more power away from the state.

However, as far as broader markets go, the biggest point to understand about a stronger yuan is probably this: if a weaker yuan is deflationary, a stronger yuan is inflationary. A stronger yuan pushes up prices of Chinese exports, but it also enables China to buy more commodities per yuan, for example, which in turn may boost demand for raw materials even further than it already has. If China is exporting inflation, that’ll start to show up in consumer price indices before too long. That would leave the Federal Reserve in the US with a potential quandary. The Fed has said it will tolerate inflation higher than target. But how much higher?

The pandemic is still obscuring a great deal of this concern. But it’s going to become an issue, and I think one surprise for 2021 is that it will become an issue much more quickly than anyone expects. Betting on inflation for this year is not a contrarian bet, but the “reflation” trade in vogue, is fundamentally a positive, “Goldilocks” scenario. The idea is that we get higher but manageable inflation, in just the right amounts (hence the “Goldilocks” term).

The tricky thing about inflation is that it has a nasty habit of being self-feeding once it’s out there. It’ll be interesting to see what level starts to get people rattled. On that note, you should listen to our recent podcast with Russell Napier if you haven’t already.

Anyway – we’ll have more on this in the upcoming issues of MoneyWeek magazine. Get your first six issues free here.