The US Dollar Isn’t Going Anywhere

And most people should be happy about that...

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Is the US dollar in trouble?

In the last week, Saudi Arabia entered a trade alliance with China, Russia, and India known as the Shanghai Cooperation Organization (SCO).

Then Russian president Vladmir Putin said Russia is considering China’s yuan as its “reserve currency.”

After that, China and France completed a massive energy deal using the yuan instead of US dollars.

To the untrained eye this may all sound like it’s bad for the US dollar…

…but in reality, “de-dollarization” or a global shift away from using US dollar is at minimum decades away.

But if it were to happen, this is how it would affect your portfolio.

How the Dollar Took Over the World

The US dollar has been the predominant currency used in international trade since the 1940s.

For example, if Japan wants to buy oil from Saudi Arabia, they’ll pay in US dollars instead of exchanging Japanese yen for Saudi riyals. 

The US dollar has remained the currency everybody uses and “reserve currency” because:

• the US government is stable

• the US dollar is widely accepted all over the world

• the dollar is easily convertible to other currencies

Now the tradeoff for the rest of the world is it grants the US government lots of influence, as they control the US dollar via the Federal Reserve. That means they can effectively cut countries out of the global financial system…

…which is what happened in 2022 when the US and its allies cut Russia out of the SWIFT Network.

The US is now feeling the backlash from this move from the international community.

That’s why Saudi Arabia, Russia, and other nations are cozying up to China.

We’d enter a new global paradigm if the Chinese yuan were to become the new go-to currency for international trade.

That said, claims the US dollar is on its last legs from foreign adversaries is nothing new.

One of the Oldest Saws in the Toolbox

Saudi Arabia, Russia, and China have claimed to be “shifting” away from the US dollar since the 1970s.

For instance, China made an attempt to become the global reserve currency in 2016…

…an effort that barely made a dent in the yuan’s share of international trade:

It’s been a similar story for the Saudis, who have been trying to shift away from using the US dollar since the 1970s:

And while some currencies have chipped away at US dollar supremacy over the last few decades...

…the dollar is still by far the top dog on the global stage. This is especially true during times of crisis, as the US dollar is considered a “safe haven” asset.

For instance, look how investors dumped euros and emerging market currencies since the onset of the COVID-19 pandemic…

…and Russian invasion of Ukraine:

While the US has its issues, the fact is people want to hold relatively safe US dollars instead of less-safe Chinese yuan during times of crisis.

And I don’t expect this dynamic to shift any time soon.

People Only Want US Dollars

I'm not saying the US and its currency are perfect.

The US dollar is simply the best choice among a lot of bad options. This is a key reason every country on Earth holds dollars in their foreign currency reserves.

In fact, over half of all currency reserves in the world are US dollars.

On the other hand, not only is the yuan only 2.8% of all reserves, nobody even wants to own Chinese government bonds.

Since early 2022, foreigners have been selling yuan-denominated bonds almost every single month (with the exception of a tiny inflow in Dec 2022).

Total outflow from international investors since early 2022 is >$100bn. If China ever wants to be a global reserve currency, they first need to learn how to make their debt markets attractive.

Because the globe has a seemingly unending appetite for US government debt:

And until China liberalizes its opaque financial system, foreign investors will simply not be comfortable holding Chinese yuan in their reserves.

But for argument's sake, let's say countries will start holding yuan in reserves. That will certainly be bad for the dollar, right?

Nobody Should Want De-Dollarization

Again, the US dollar is a "safe haven" asset.

For example, during the COVID-19 pandemic investors flocked to US government bonds...

...and US dollars:

The US dollar benefits from chaos. And trust me, the process of de-dollarization will be extremely chaotic for the world. This would likely send the value of dollars and dollar-denominated assets higher rather than lower. And what comes after that is anybody’s guess.

I don't think the US dollar will lose its reserve currency status any time soon.

But if my thinking changes, you'll be the first to know.

Stay safe out there,

Robert