Will the shortage dollar really come

As the epidemic has not completely been over and the global economy has not fully returned to normal, cash flow in financial markets is still quite tight. In this context, the dollar has fluctuated sharply recently, and it has been difficult for traders to find a clear trading direction. The trend of the US dollar has a significant impact on the trend of gold, forex, bond and other major markets. Whether we are large institutions or retail investors, we should well analyze and grasp the trend of the US dollar. The Fed continued to offer liquidity support, three-month Libor-OIS spreads narrowed from highs, and the dollar index fell from 103 to 100, indicating a partial relief from the dollar shortage.

The economy is in recession and international trade is shutting down, which is the main reason of the dollar shortage. Because investors and companies are worried about a widespread wave of debt defaults and cash shortfalls and American companies have always pursued highly leveraged business strategies, when the crisis hit, companies and investors would sell US bonds and US stocks and hoard US dollars so as to quickly drain liquidity of currency in the market. However, in order to ensure normal liquidity in the market, the Feds investment is the biggest guarantee for companies and investors.

According to data, the Fed has bought more treasuries over the past six months than all foreign buyers combined in the same period. Furthermore, the status of US dollar in the global reserve currency increases the possibility of a dollar shortage. Years of trade deficit has not really affected the American economy, because while foreign companies hold $40 trillion in assets, they are also saddled with more than 12 trillion dollars-denominated debt, among which emerging economies have the heaviest debt burden. Foreign investors have acquired enough dollars, but they have invested a lot in US assets, so the United States has not lost money. In other words, the demand for dollars in the offshore market is crucial to the overall liquidity of the dollar, because once international trade shrinks, a large number of corporate capital chains will be so tight that they urgently need to raise enough dollars to repay their debts, even at the expense of some liquid assets, such as US Treasuries.

To sum up, there are only two key factors that determine dollar liquidity: thestrength ofthe Feds releases, and the demand for dollars in the offshore market.

Will the dollar shortage really come？

From the end of 2019 to May of 2020. The balance sheet of the Japan Central bank and the European Central bank has increased by 11-13%. In comparison, the Fed's balance sheet grew over 70% at the same time.

At the end of 2019, the balance sheet of Japan Central bank was about 104% of Japans GDP. The ECB's balance sheet was about 38% of Eurozone GDP, while the Fed's balance sheet was about 19% of America's GDP.

By the end of May 2020, the proportion of the Bank of Japan has risen to 116 %, a net increase of 12%, the ECB 43%, a net growth of 5%, and the Federal Reserve 33%, a net growth of 14%. From the data, we can see that the Fed is printing money faster than other central banks. In addition to the monetary policy of the central bank, the scale of the government's fiscal stimulus is also unprecedented.

Since the epidemic outbreak, governments have adopted a large number of fiscal stimulus packages to mitigate the impact of a widespread economic shutdown, and the main method of raising money is for central banks to print money to buy sovereign bonds. Unlike QE in 2008-2014, which has been mainly used to adjust the capital structure of central banks, QE in 2020 is mainly aimed at monetizing fiscal spending.

In American, as for the unemployed, they will receive US$1200 check as a subsidy. Besides regular benefits, they will also receive extra US$600 unemployment benefits. According to data, the US money supply is growing at the fastest rate currently, so it can be inferred that there are also dollars on the market that can fill the liquidity gap, and it depends on how much investors invested.

The US dollar plays a very important role in the global financial market, and the trend of US index has significant implications on American financial market and real economy. A strong US dollar will reduce the income of multinationals and weaken their competitiveness in the world. During the period of a strong dollar, its performance always serves as an economic guide. The sharp rise in the dollar index often coincides with bottoming out in the US stock market (and other stock markets around the world), which is more important to investors. In other words, if there is a severe shortage of dollars around the world, foreign investors will sell dollar-denominated assets to get dollars, and domestic companies and institutions will do the same because of margin calls.

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