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The continued unraveling of the ‘dollar bloc’

Over the past year I again, again and again have argued that the tightening of US monetary conditions will cause the ‘dollar bloc’ to fall apart – meaning that more and more countries will give up their de facto pegged exchange rate policy against the US dollar.

The process is well underway and is likely to continue – especially because the Federal Reserve is overly eager to hike interest rates.

The most important member of the dollar bloc other than of course the US has been China, but we all know that China has started the process of de-coupling from the dollar. This is from Bloomberg today:

China’s central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened.

The reference rate was lowered by 0.3 percent to 6.5693 per dollar. A gauge of the dollar’s strength rose to a two-month high Tuesday as traders boosted wagers that U.S. interest rates will rise. The yuan weakened 0.1 percent to 6.5636 in a third day of losses as of 10:27 a.m. in Hong Kong.

A resurgent greenback is shaking up a strategy that the People’s Bank of China pursued over the past three months — a steady rate against the dollar, combined with depreciation against other major currencies. Traders are now pricing in a better-than-even chance of the Federal Reserve boosting borrowing costs by its July meeting, with officials lining up to indicate their willingness to support such a move, should the current strength in the economy be sustained.

And this will continue and more contries will follow. The dollar bloc is falling apart and that is great news for the global economy.

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