Rising inflation, as well as disappointing job growth data, continues to weigh on the US Dollar. While the Biden administration and Federal Reserve are prepared to spend even more to kick the economy into a higher gear, it will come at the cost of ever-more monetary debasement.
Overseas, Russia’s ongoing de-Dollarization efforts and China’s relative economic strength are putting even more downward pressure on the USD. Often running inverse to the Dollar, gold and precious metals continue to be the primary beneficiaries of surging prices around the globe. This has prompted central banks to continue buying up swathes of gold reserves.
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Over the last two months, the US Dollar index (DXY), an index of the value of the United States Dollar (USD) relative to a basket of foreign currencies, has given up al of the gains it made in a Q1 rally. During Monday trading, the DXY fell back below 90 where it started the year.
That move came in the aftermath of Treasury Secretary Janet Yellen’s suggestion that President Biden should move forward with a $4 trillion in spending plan for infrastructure, jobs and family care, even though she expects inflation will now remain elevated at 3% YoY until about the end of 2021.
Yellen also urged other nations to continue forging ahead with more spending, noting at a G7 press conference that “Most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery…”
As the Secretary has suggested, the US is still knee deep in an ongoing recovery and, looking at last week’s job numbers, employment remains a key sticking point. The US economy added only 559,000 jobs in May, well below the consensus estimate of 650,000. That came after an even worse undershoot of 266,000 jobs added in April, versus a forecast 978,000. The labor force participation rate in the US edged down to 61.6% in May, 1.7% below pre-pandemic levels in February 2020.
With the Fed looking down the barrel of more monetary debasement and breakout inflation, which threatens to push US real rates even more deeply into negative territory, the Dollar continues to face significant downward pressure. Internationally, even more risks are mounting.
Russia Ramps up De-Dollarization
Late last week, Russia made the decision to fully remove US Dollar assets from its $186 billion National Wealth Fund over the next month. To replace the $40 billion of USD assets, Russia will expand its holdings in Euro (EUR), Chinese Yuan (CNY) and gold assets. In order to reach the targeted FX structure, the Ministry of Finance will exchange their Dollars for $23 billion equivalent of gold, $18 billion equivalent of CNY and $5 billion equivalent of EUR. This move continues a broader trend of Russian de-Dollarization tactics that MRP has been following since 2017.
As ING notes, the removal of the Dollar from the NWF won’t necessarily trigger a full de-Dollarization of Central Bank of Russia (CBR) reserves, and it may have “little implication for the market” on its own. However, it could be just the first sign of more efforts to divest from the Dollar.
Earlier this month, Russian Deputy Prime Minister Alexander Novak said the oil and gas-rich country may soon move away from US Dollar-denominated crude contracts if President Joe Biden’s administration continues to impose targeted economic sanctions. In 2019, Russia’s state-owned oil giant Rosneft moved all its oil export contracts into Euros.
Though Russia isn’t outright prohibiting the country’s companies from using the Dollar, a very difficult task for a nation still reliant on Dollar-priced commodities like steel, Bloomberg notes the government will indeed utilize economic incentives to encourage the use of the EUR over USD going forward.
Gold’s Rise Guides More Central Bank Buying
Russia’s expansion of gold holdings is nothing new. Gold made up 23% of the CBR’s international reserves as of June 2020, surpassing the share of Dollar holdings, which dropped to 22%, for the first time ever. As Bloomberg writes, Russia spent more than $40 billion building a war chest of gold over the past five years, making it the world’s biggest buyer.
With an estimated output of 331 tons in 2020, Russia was the second-largest gold producer in 2020, tripling its output…