A sense of optimism has returned to global financial markets, as they take in the expectation of continued accommodation by central banks and the resumption of trade talks between China and the US. While President Trump’s capacity to surprise and his tendency to interject directly make the eventual outcome of the trade negotiations difficult to predict, there are four developments investors should be prepared to encounter.

Even exorbitant privileges can be lost, and there are a number of factors suggesting that, over time, the US dollar may be at risk of surrendering its lead, if not its role, as the world’s pre-eminent reserve currency. The reasons for this relate partly to US policy decisions, and partly…

Recent challenges to central bank independence in a number of countries mark only the beginning of an extended macro policy debate that is likely to play out in the years ahead, especially where economic growth is slowing. — In emerging and developed markets alike, strong central bank balance sheets (generating seigniorage profits) compared with those of governments, combined with well-earned central bank policy credibility in many jurisdictions, are attracting the attention of fiscal policymakers. …

The Trump administration has initiated a trade dispute with China with the stated goal of reducing America’s bilateral deficit. But given the strengthening dollar and expansionary US fiscal policies, the US trade balance will almost certainly worsen for the foreseeable future. — Now that they are on the receiving end of US tariffs, Chinese policymakers have three options. First, they could capitulate, by scaling back many of the “discriminatory practices” identified in the US Trade Representative’s March 2018 report on technology transfers and intellectual property. …

“Fear of floating” is alive and well among EM central banks — The recent strength of the US dollar, which is up about 3.5% in nominal effective terms since late January following a two-year depreciation, is causing investors to re-evaluate their emerging market (EM) exposures. Comparisons with the 1982 Mexican crisis and the 1997 Asian crisis are alarmist and overdone, but faith…

In December 2017, the eurozone’s current-account surplus reached an all-time high of EUR391 billion (USD483 billion), prompting the usual calls for Germany to “do more” to resolve the imbalance through fiscal policy. — But such policy prescriptions are misguided, because they do not fully consider the role of the financial account in the balance of payments, or that of monetary policy in influencing international financial flows.

The governments of Canada, Mexico and the United States arrived earlier this year at the North American Free Trade Agreement (NAFTA) renegotiations with three different sets of priorities. — Positions on some issues are broadly aligned, suggesting scope for compromise and agreement in those areas, while others appear further apart, diminishing the prospect of a deal being reached within the allotted — and recently extended — timeframe.

It has been several years since policymakers seriously discussed the merits of fiscal austerity. — Debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent. There is no mistaking which side won, and why. Austerity is dead. And as conventional politicians continue to…

The US dollar will almost certainly remain the world’s most important reserve currency for the foreseeable future. — The US dollar will almost certainly remain the world’s most important reserve currency for the foreseeable future, as no other offers the same set of advantages to money managers, including central banks, or is as deeply embedded in the global financial system. …