What do the recent excitement in the repo market, the desire for an alternative global reserve currency (be it libra, the renmimbi, the euro, or something else entirely), more volatile financial markets, slower global economic growth, lower interest rates, and the dollar's strength all have in common? They are all linked to the global dollar/safe asset shortage. The dollar's role in the global financial system is at the very heart of most of the financial market issues (and to some extent also the geopolitical ones) we face today. And while the system is still functioning, its shortcomings are becoming increasingly apparent and increasingly troubling for the global economy. In this week’s Economics Weekly, we explore one of the often overlooked, but one of the most important, issues facing the global financial system today—the dollar/safe asset shortage.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.