There is a lot of news about the U.S. dollar (USD) and how sustainable it is as the world currency in the future. While I don’t expect a major shift away from the dollar during my lifetime, we do see currencies and their use gradually changing over time.
• Currently the USD represents 58 percent of the world’s central bank reserves. This is down from 75 percent in 2000. This reserve currency is a magnet for foreign investment in the United States, according to William Greiner, CFA®.
• Some of the reasons for the renewed interest in world currencies is due to Russia, China and India talking with Brazil and South America about creating a new currency to challenge the USD. They want to trade directly with each other in their own currencies.
Let’s take a look at the current facts, according to JP Morgan.
• China’s currency the Renminbi (RMB) was the fifth most traded currency in the world last year.
• The U.S. share of global trade is about twelve percent, and the U.S. share of global GDP is about 25 percent. Yet the dollar’s share of foreign exchange, trade, debt, and exchange reserve is much higher, which is why the dollar is known as the world’s reserve currency.
• About 35 percent of all Treasury bonds are owned by foreign investors.
• The dollar’s role in foreign exchange markets has been mostly unchanged over the last 20 years or more. In 2022, the dollar accounted for about 89 percent of all foreign exchange transactions. The dollar’s dominance in international finance is clear with the dollar used in about half of all trade invoicing—much higher than the twelve percent share in global trade.
• The dollar is still the dominant currency of choice for investment of foreign exchange reserves at about 60 percent.
• Some central banks are diversifying holdings away from the dollar and the euro, but only 25 percent of the shift is explained by increased allocations to the Chinese RMB. Much of this was driven by Russia which holds one third of all RMB reserves.
• U.S. sanctions remain on many countries, most notably the freezing of Russian assets after the Ukraine invasion.
• Commodities such as oil are priced and traded in dollars worldwide.
• More foreign currencies are pegged to the U.S. dollar than any other currency including China’s. China is also our largest trading partner with foreign trades pegged to the dollar.
Investment Strategist Brett Lapierre, CFA® states, “I see some weakness in the USD over the next few years as it is fundamentally overvalued. This, combined with stronger economic growth outside of the U.S., higher interest rates and trade deficit, could all put pressure on the USD. A recession could mean the dollar bounces in the short term in a flight to quality trade but over time, I expect the dollar to weaken.”
Given these facts, the U.S. dollar is alive and well and remains the stronghold currency worldwide. This could change over time as we see improved economic growth in other countries, and as we incorporate more foreign trade.
In our opinion, it is important to make sure your investment portfolio is diversified based on your risk tolerance to include investments that can potentially benefit from these economic conditions.
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is managing director for Mariner Wealth Advisors.