CentralBankactionsandanti-fragilityofUSDollar

The central banks across the world have cut the policy rates. BOE after slashing the rates from 0.75% to 0.25% a week back have decided to reduce it again to an all time low of 0.1%. Reserve Bank of Australia also cut the interest rates to record lows of 0.25% and instituted its first ever QE program. South Africa Reserve Bank reduced the rate by 1% to 5.25% which was a 50 bps higher cut from the market expectations.

Rate cuts and QE are part of the tool kit of central banks to keep the world of finance going as it reduces the cost of funds for the businesses and allow them some relief from the loss of business. Govts also are framing up measures at their end where they will directly put money in the hands of people and small businesses. US govt is firming up a stimulus plan of 1.2 Trillion Dollar, Canada is planning to put CAD 900 directly in the hands of the people in need. Now all this spending needs to be funded, in the time of crisis taxes cant be raised, so this needs to be borrowed. But if all the countries across the world are breaching the fiscal targets then what. In this respect, US is in position of privilege as it can borrow in its local currency.

The dollar index is trading at 102.10 and dollar has gained against Euro, Yen and Sterling. As cash is at premium and dollar is in demand, the other countries can only be jealous at the unique situation of greenback. Now a bit of history here. As the WWII winded down, the victors assembled in the US town of Bretton woods to put together a new post war financial system. As the only country which was not majorly impacted by the perils of war, US proposed to become the accountant and the money keeper of the world. Rest of the world agreed for the scheme. No body could have imagined that this one act of putting US Dollar as a reserve currency would generate such an enormous leverage for ad inifintum.

Even after 75 years of the Bretton Woods meeting, world has not been able to find any reserve currency alternative. Any attempt in form of Euro, Yen, Yuan and stateless bitcoin have proved to be futile. In that sense, US Dollar has proved to be an antifragile currency, to borrow a term from Nassem Taleb. Anything is antifragile in case it gains from stress and crisis. We have seen that in times of Crisis like GFC or the current one, US Dollar becomes precious. With the understanding that volatility will be the norm going ahead too, any likelihood of USD getting dislodged from its premier position is very bleak.

Domestically INR after touching the life time lows yesterday, trades below 75 in the opening today. On the bond side, the expectation is rife that there can be a policy action can happen before the scheduled meeting date. The cases of corona cases keep increasing but not at an alarming rate. The Prime Minister addressed the nation yesterday and announced the formation of a task force to assess the economic impact of shutdown and recommend policy measure. In a related news, southern state of Kerala announced a fiscal package for its citizens. It might prompt other impacted state to follow suit.