As we discussed yesterday, the metals complex is broadly leading global asset class performance for the year. It's wartime behavior.
It's also behavior that tends to be associated with global uncertainty about dollar liquidity.
On that note, that topic has bubbled up in recent days.
In times of uncertainty, global banks tend to scramble for U.S. dollars, to meet dollar-denominated liabilities. In Argentina, there's an economic and currency crisis underway. The peso has lost about 40% of its value (vs. the dollar) since April, making foreign currency denominated debt more expensive.
Scott Bessent said yesterday that the U.S. Treasury "stands ready to do what is needed within its mandate to support Argentina," which, importantly, includes providing access to U.S. dollars (via currency swaps).
South Korea is also asking for a currency agreement (currency swaps) with the U.S. to pair with its commitment to make significant dollar investments in the U.S., as part of a U.S./South Korea trade deal. To do the deal, they need access to dollars, without taking risk on how the exchange rate might move.
In the above, "access to dollars" becomes a bargaining chip for the Trump trade team. In the case of Argentina, the Trump administration is supporting a leader they align with, one that's reversing the globalist agenda.
It's leverage.
That said, dollar swap lines are typically the domain of the Fed (where the real firepower is), not the Treasury.
This dollar liquidity solution was a very key step in repairing stress in the global financial system back in the Global Financial Crisis.
By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world — shoring up solvency and confidence, and stabilizing the global banking system.
As we've discussed the past several months, major global central banks have done nearly everything in coordination for the better part of the past 15-years (since the Global Financial Crisis), which has included implicit, if not explicit Fed support (including access to dollars/swap lines when needed).
But the coming regime change at the Fed means the era of coordinated global monetary policy is likely over.
With that, let's revisit an excerpt from my August 5th note:
"… the focus would quickly turn to Europe, where fragile sovereign debt markets have been explicitly backstopped by the European Central Bank since the summer of 2022.
If the Fed no longer has the European Central Bank's back, then the ability of the ECB to backstop European sovereign debt will be tested.
And it probably won't go well. Remember, these EU member states have large scale deficit spending coming down the pike, to fund defense and AI commitments. And the ECB will be, almost certainly, back in action to tame the bond yields of the fiscally vulnerable countries. Without global coordination, they will lack the firepower."