Geopolitical Risk Analysis - U.S DollarMajority of economists misjudged the US dollar valuation . The conventional consensus claimed that Quantitative easing (QE), or increasing the money supply, would depreciate the currency. However, It doesn't appear to be as straightforward as it portrays. Valuation of a currency is determined by multiple factors like, where the new money supply gets channelized, whether the economy is expanding in tandem with the new money supply, the comparative perception of the currency's stability & safety, the income & capital appreciation provided to those holding assets denominated in that currency, and, in the broader context, the government or institution issuing the currency's resilience, transparency, and adaptability.
Key traits of a stable global currency:
• Currency Standard - The currency is free to float in any and all international markets; it is not tied to any other currency.
• Global Market Transparency - which means that the market and governance systems are visible to everybody and are not vulnerable to overnight devaluations, confiscations, capital restraints, and other measures imposed by opaque governments.
• Diversely Allocated - The currency is allocated by broad economic segments and not rely on imports & exports to maintain its essential stability and strength. (eg: Venezuela Hyperinflation)
• Free Flow - The issuing country ensures ease of flow: capital, skills, and businesses enjoy basically unlimited freedom of movement within the jurisdiction of the issuing nation or entity.
• Stable FX Rates - The official exchange rate and the street or OTC exchange rate are almost equal.
• Store of wealth - Enough currency is issued to serve as a store of value and a medium of exchange worldwide.
Transparency and adaptation lead to systemic stability. The stability of a strict centrally planned economy is tenuous because it is a symptom of fragility and anxiety: fear that if the restraints are removed and markets are finally free to determine price, the entire system would eventually collapse. This takes us to the US dollar, with it's increasing purchasing power. using conventional methodology we can argue that this is attributable to the Federal Reserve raising interest rates and limiting money supply in order to fight inflation.
However, this emphasis on the domestic economy misses the fact that the Federal Reserve is also a global central bank. Many of the backstops and guarantees granted by the Fed to "rescue the world" during the 2008 Global Financial Meltdown went to non-U.S. institutions.
The money issued by a nation or organisation is the basis of worldwide influence and power. Currency standard and exchange rates set by government are indicators of systemic instability, indicating that the authorities are aware that the market will not place the intended value on the currency.
Markets, however, discover pricing independent of currency standard or authorized FX rates. Market participants value a currency that trades transparently on global marketplaces. This price-to-value is reliable. Currency standards and authoritative currency rates are untrustworthy because they can be modified overnight by opaque organizations.
