British pound is taking on ‘emerging market’ characteristics

Short positions have been mounting against the currency

Sterling is in danger of becoming an “emerging market” currency as falling growth and growing risks cause investors to flee the pound, according to Bank of America.

As of Tuesday afternoon in Europe, sterling was down 7% against the dollar year-to-date, trading just below $1.26 having been as low as $1.22 earlier this month. Short positions have been mounting against the currency as the global economic challenges of the war in Ukraine, inflation, supply chain bottlenecks and slowing growth converge with domestic risks stemming from the Bank of England’s unique predicament and the fallout from Brexit.

In a research note Monday, BofA Senior G-10 FX Strategist Kamal Sharma said further weakness can be expected in the pound through the rest of 2022. He also dismissed comparisons between the monetary tightening paths of the U.S. Federal Reserve and the Bank of England, arguing that the reaction functions of the two central banks are different.

“The challenges facing the BoE are unique along with a supply dynamic that it remains wholly unwilling to discuss: Brexit. This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency,” Sharma said.

Russia to choose between using its scarce dollars for debt repayment or facing a sovereign default

Helping Russia may worry foreign banks about the risk of U.S. financial sanctions

On Tuesday, the U.S. Treasury tightened the financial pressure on Vladimir Putin by prohibiting U.S. financial institutions from facilitating dollar-denominated debt payments to investors. Simply put, it made it much harder for Russia to pay its bondholders, raising the risk that Russia will default on its sovereign debt. Usually, governments that default on their debts face serious consequences. However, it is possible that Russia may be less worried about this action than other governments would be.

Russia, like other countries, borrows money by selling bonds. The bondholders provide it with money now in exchange for the promise to pay it back at a set date, paying interest along the way. The new U.S. government action doesn’t make it absolutely impossible for Russia to pay back its bondholders, but it makes it much harder. The idea is to force Russia to choose between using its scarce dollars for debt repayment (rather than other purposes), or facing the consequences of a sovereign default.

The U.S. decision means that if Russia wants to pay its bondholders, it will have to use dollars that are held outside U.S. institutions. Even that may be hard. Foreign banks may worry about the risk of U.S. financial sanctions and decide that the legal and reputational risks of helping Russia are too high for them to want any involvement.

Jack Dorsey says crypto will replace the dollar

“You don’t own ‘web3,’” he wrote. “The VCs and their LPs do.”

The cofounder and former CEO of Twitter on Monday evening took to the social media platform to declare his belief that Bitcoin would replace the dollar.

Responding to a question from singer Cardi B (no, really!), Dorsey once again showed enthusiasm for the cryptocurrency, setting off a firestorm of comments from critics in the replies.Dorsey is one of Bitcoin’s biggest cheerleaders, saying earlier this year at the Bitcoin 2021 conference in Miami that the crypto “changes everything” for him and “I don’t think there’s anything more important in my lifetime to work on, and I don’t think there’s anything more enabling for people around the world.”

Block (formerly Square), where Dorsey remains CEO, has invested heavily in Bitcoin. An October report in Bitcoin Magazine said the company held nearly 8,027 Bitcoins. That would put the current worth of those holdings at $390 million.

Dorsey’s Monday tweet-storm also touched on his thoughts about Web3, which some people believe will be the next iteration of the internet. Long story short? He’s not a fan. “You don’t own ‘web3,’” he wrote. “The VCs and their LPs do. It will never escape their incentives. It’s ultimately a centralized entity with a different label.”