The U.S. economy, guidedbytheFed, isthelargestintheworld.
The U.S. economy's statureisoneofthekeydriversoftheimportanceoftheFed, giventhatthe U.S. economyremainsoneofthelargesteconomiesintheworldandcertainlyoflateoneoftheonesthat's beenfastestgrowing.
A countryanditscurrencydoesn't becomeimportantandtheworld's mostimportantcurrencyovernight.
Andthat's reallywhatwesawinearlyAugust, wherewehadthissuddenglobalmarketselloffthatinitiallystartedoffof a weakerthanexpectedpayrollreportinthe U.S.
Thecoolinginlabormarketconditionsisunmistakable.
Westillhadjobgrowththatwaspositive.
Wehad a slightincreaseintheunemploymentrate.
Whathappenedwasthatitwasweakerthanexpected.
Theweaklabordataledinvestorstoabandon a popularstrategycalledthecarrytrade.
Here's howitworks. Youborrowin a currencythatischeaper, undervalued, andthenyouinvestin a higheryieldingcurrency.
Forexample, aninvestormightborrowmoneyinJapaneseyentobuy U.S.
assetslikethe 10-yearTreasurybond.
When a carrytradeisworkingwell, thatmeansthevalueofmydollarassetsthat I'vejustpurchasedareappreciatingcomparedwithmyyenborrowingthat I'veusedtofinancethetrade. Butthatstrategycanbackfire.
IftheFedisallof a suddenexpectedtocutmorethanpeoplewereexpecting, thatcanstarttodepreciatethedollar.
Soifonecentralbank's cuttinginterestrates, theFed, andanothercentralbankisraisinginterestrates, theBankofJapan, itleadsto a weakerdollarandandepreciationintheyen.
Forexample, theBankofJapanhad $225 billioninoutstandingwithdrawalsfromitsswaplinewiththeFederalReserveat a pointin 2020.
TheFedprovidesthoseloansto a selectgroupofinternationalauthoritiestoensurethatdisruptionsabroaddon't createproblemsbackinthestates.
It's a greattoolduringperiodsoffinancialcrisistoknowthattheFedistherewillingtoprovidedollarswhentheglobaleconomyneedsit.
In a way, it's aninsurance.
IftheECBneedsdollars, whataretheoptions?
Theycangoto a swaplineortheycansellthe U.S.
Treasurysecuritiesthattheyown.
You'd rathernothaveeverybodysellingthe U.S.
Treasurysecuritiesbecausetheyneeddollars.
You'd ratherhavesomeotheroptionavailabletothemlike a swapline.
Theuseofswaplinescanhaltrapidswingsinthevalueofdollarsandothercurrencies. Ifyoulookatglobalforeignreserves, ifyoulookatforeignexchangetrades, allofthosetradesaredonemostlyin U.S.
ThefloodofEVsthatweseecomingoutofChinais a directresultofthefactthatChinahasbecomedebtsaturatedandcan't useitspreviousgrowthmodeltojustincreaseinvestment, increaseleverage.