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Dire dollar shortage shows world failed to fix key crisis flaw
By Christopher Anstey and Enda Curran
Sunday, March 22, 2020
The global rush for dollars that's been roiling the $6.6 trillion-a-day foreign-exchange market has showcased a missing piece of financial-safety architecture that world policy makers never addressed in the aftermath of the 2008 crisis.
The financial system's reliance on one keystone currency proved to be an amplifier of shocks more than a decade ago. Yet since then the greenback's role has climbed even further as borrowers outside of America ramped up dollar-denominated debt. That's again adding an enormous layer of stress on markets.
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"It's precisely what the global economy does not need at this moment," Alexander Wolf, head of Asia investment strategy at JPMorgan Private Bank and a former U.S. diplomat in China, said of a strong dollar. "It tightens financial conditions, make servicing dollar debt more expensive, and can cause pass-through inflation just when that is not needed."
As often occurs during bouts of extreme currency fluctuation, there's been speculation about something akin to the 1985 Plaza Accord that sought to rein in a runaway dollar. Observers discount that possibility now. But one of the key takeaways from the current episode may be that one important currency finds itself burnished: China's yuan.
The salve for emergency dollar demand that the Federal Reserve came up with during the global financial crisis -- giving other central banks the power to deploy greenbacks abroad via swaps with the U.S. -- has been applied again. The Fed broadened the group of counterparts on Thursday, including some emerging economies, though not China or India. ...
"The dollar's surge will renew calls for a shift from a dollar-centric global financial system," said Eswar Prasad, who once led the International Monetary Fund's China team and is now at Cornell University. "But the pandemic has also fractured global governance, making it harder to envision the G-20 devising a viable alternative."
A similar surge in the dollar occurred back in 2008, prompting China's then-central bank chief, Zhou Xiaochuan, to call for a super-sovereign reserve currency in early 2009. The following year South Korean officials tried to get the Group of 20 to consider permanent exchange-market architecture to address vulnerabilities. ...
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