The US dollar, long regarded as the world’s global reserve currency, is facing growing speculation among experts about its long-term decline in dominance. Several key factors contribute to this outlook, raising questions about the future of global finance and investment.
There are several reasons why the dollar’s dominance is on the wane.
A major concern is the ballooning US national debt. Over the years, the US government has accumulated substantial debt levels, particularly in the wake of economic crises and pandemic relief efforts. It’s currently around a staggering $33 trillion.
The sheer magnitude of this debt could undermine confidence in the dollar, as investors worry about its long-term sustainability.
Also, the global economic landscape is evolving, with emerging markets like China gaining prominence. As these economies grow, their currencies become more attractive for international trade and investment. The yuan, for example, is increasingly being used in global transactions, eroding the dollar’s traditional dominance.
Earlier this year, I was one of the first voices to flag the threat to the US dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trades.
I was quoted as saying that one of the most significant, but under-reported, outcomes of a three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements.
Separately, two deals, announced a week earlier, will see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity. It was reported that Saudi Arabia was also in talks with Beijing to settle with the yuan instead of the dollar.
It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan, that would lead to an enormous shift in the global economic system.
Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars.
This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars in order to do so.
If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.
In addition, continuous monetary easing is also leading to the devaluation of the US currency, as it erodes the purchasing power of its holders and diminishes its appeal as a reserve currency.
The decline in the dominance of the US dollar is likely to have significant implications for investors around the world, as it impacts currency values, asset prices, and investment strategies.
Investors should be thinking about diversifying their currency exposure in assets denominated in currencies from countries or regions with strong or strengthening currencies. Diversifying your currency exposure can help protect your investments from the negative effects of a weakening dollar.
In the same way, and for the same reasons, they should be considering increasing exposure to international equities, bonds, and real estate.
Others will be considering allocating a portion of their portfolio to precious metals like gold and silver. Historically, these assets have served as hedges against currency devaluation. Some investors view cryptocurrencies like Bitcoin as a store of value and a hedge against fiat currency devaluation.
Assets that tend to perform well during inflationary periods, such as real assets – like real estate and commodities, inflation-protected bonds, and dividend-paying stocks with a history of increasing payouts must also be part of the mix as the dollar declines in dominance.
While experts predict a long-term decline in the dollar’s dominance, it’s essential to understand that this process is gradual and complex. The dollar will likely remain a significant player in the global financial system for the foreseeable future.
However, the trends mentioned above indicate a shift in the balance of power and the need for diversification and careful consideration by investors and policymakers.
A financial advisor or investment professional will help you navigate the changing landscape and tailor your investment strategy to your specific financial goals and risk tolerance.
Nigel Green is founder and CEO of deVere Group
Also published on Medium.
