US Dollar Global Dominance: Historical Predictions vs. Current Reality
We periodically read missives to the effect that “the dollar is doomed.” And we have been reading them for many years.
Consider this newsletter promotion from 1985. The headline was a lot like those we see today: “Get Your Dollars Out of the USA Before Uncle Sam Gets Them Out of You.” The copy predicted an imminent collapse in the US dollar’s value, along with hyperinflation.
Of course, neither of these things happened in 1985 or over the next 37 years. Given this, you can understand why we tend to be skeptical when we read breathless pronouncements of impending gloom and doom for the greenback.
That’s especially true because, at the moment, the dollar is surging in value. It’s at a 20-year high against the euro, a 24-year high against the Japanese yen; and a 37-year high against the British pound.
And we wouldn’t be surprised if the dollar strengthens further in the next few months, especially if the Federal Reserve follows through on its promises to continue raising interest rates.
But behind the scenes, the dollar looks more vulnerable. We see four trends pointing the way.
1) Decreasing Share of Global Reserves
First, while the dollar is effectively the world’s reserve currency, its share of global central bank currency reserves has been steadily shrinking for many years. Today, about 59% of global central bank currency reserves are held in dollars. But in 2000, that number was 70%.
2) Political Misuse of Dollar’s Privileged Status
Second, American politicians have grossly abused the dollar’s privileged status. One way they’ve done so is by borrowing trillions of dollars to finance the country’s welfare-warfare state while simultaneously cutting taxes. No matter how much money its politicians borrow, central banks still need to accumulate dollars since so many global transactions are settled in dollars. Companies everywhere that conduct business internationally need to exchange their local currencies for dollars to pay for goods and services.
3) US Sanctions and the Dollar as a Hammer
Third, Uncle Sam persists in using the dollar as a hammer to hold over the heads of its adversaries. One form this hammer takes is US domination of the international payments settlement system called SWIFT – the Society for Worldwide Interbank Financial Telecommunication. This organization offers over 11,000 financial institutions in more than 200 countries a network enabling them to send and receive payment orders – mainly dollars – in a secure, standardized format.
Even though SWIFT is headquartered in Belgium, Uncle Sam has a great deal of influence over it. Thus, we anticipated that within days of Russia’s invasion of Ukraine earlier this year, SWIFT ejected most Russian banks from its network. Russia now joins Iran and North Korea as countries effectively isolated from the global dollar clearing network.
4) De-dollarization Efforts by US Adversaries
Fourth, the targets of US sanctions are taking steps to de-dollarize. We wrote about some of them in this article last year. Since then, Russia and China have taken steps to end the use of dollars altogether. The latest initiative in this direction occurred in June at the 14th BRICS summit. BRICS – an acronym for the countries of Brazil, Russia, India, China, and South Africa – isn’t an organization as such, but rather a group of countries pursuing common goals. High on the list of those goals, as Chinese President Xi stated in his keynote speech:
We should expand BRICS cooperation on cross-border payments to facilitate trade, investment, and financing among our countries.
Russian President Putin disclosed another crucial BRICS objective – setting up a new global reserve currency. It would consist of a basket of BRICS countries’ currencies.
It’s unlikely any of these initiatives pose a short-term threat to the dollar. Yet, the BRICS countries collectively account for 41% of the global population, 24% of global GDP, and 16% of global trade.
Short-term Strength but Long-term Decline
Meanwhile, Americans are enjoying the effects of having the dollar riding high. For instance, they’re flocking to Europe to buy real estate. The hottest markets at the moment for buyers with fistfuls of dollars are in France (Paris and Provence), Italy (Tuscany and the Lake Como region), Portugal (Lisbon), and England (London).
The dollar’s run-up in value has also led to a prolonged decline in the values of gold and silver. So far in 2022, gold has lost nearly 6% of its value; silver nearly 19%.
Still, gold’s performance is noteworthy since the US Dollar Index, which tracks the strength of the dollar against a trade-weighted basket of foreign currencies, is up more than 14% for the year.
The Future of US Dollar Global Dominance
It’s anyone’s guess if the continuing efforts to dethrone the dollar’s reserve currency status will be successful, and when. But one thing is for sure. Eventually, the dollar is fated to join the long list of fiat currencies (i.e., currencies backed only by the governments that issued them rather than by a tangible asset such as gold) that have been debased out of existence. On its way out, you’ll see even higher inflation, bail-ins, and exchange controls.
It’s only a matter of time. Make sure you’re ready when it comes.
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