By Tim Courtney, Chief Investment Officer
The threat of “de-dollarization” has been making headlines recently.1 This refers to the potential phasing out of the U.S. dollar as the global reserve currency, i.e., its utilization to conduct most important international and debt transactions. The dollar has enjoyed reserve status since roughly the end of World War II,2 thanks to the size, strength and stability of the U.S. economy during that time.
Even though the dollar has relatively good standing against a basket of foreign currencies, we consider all currencies to be speculative assets in that their value is completely determined by supply and demand. The built-in demand provided by the dollar’s reserve status gives the dollar a special advantage compared to other currencies.
This has been jeopardized in recent years by U.S. government and Fed measures to ramp up the dollar supply through stimulus checks,3 Paycheck Protection Program loans4 and quantitative easing.5 In fact, our M2 money supply increased by more than 40% between February 2020 and July 2022.6
Fortunately, demand for dollars has continued to rise in the pandemic era to meet the increased supply. The risk is, what happens if that worldwide demand declines significantly? The immediate risk is relatively low due to the confidence that global investors retain in the dollar, but it’s still a growing concern — and that’s partly because we haven’t been very good stewards of the global reserve currency.
Consider if the shoe were on the other foot. For instance, let’s say that the yuan was the world’s reserve currency and China suddenly created an enormous amount of it to distribute to their own people and companies, while we had to earn the currency the hard way. We’d probably be unhappy and incentivized to look for alternatives.
Recent U.S. fiscal behavior might be speeding up the day where de-dollarization eventually occurs, because we’re giving other countries, entities and markets every incentive to find a viable alternative.7 At the moment, no clear competitor has emerged. But it would behoove us to behave in a way that shows the world we are good stewards and follow prudent currency policies.
From an investor standpoint, the best approach to this situation is the same way to address most investing considerations — through diversification. In addition to diversifying portfolios in terms of asset types, sectors, industries and durations, we suggest ensuring that portfolios are not entirely denominated in dollars but rather incorporate other currencies and real assets as well. If you have any questions, please contact your Exencial advisor.
- American Institute for Economic Research (4/4/23) — De-dollarization has begun
- Investopedia (9/24/22) — How the U.S. dollar became the world’s reserve currency
- CNBC (4/13/20) — The first coronavirus stimulus checks were deposited this week—here’s when you can expect yours
- U.S. Small Business Administration (7/28/21) — SBA announces opening of Paycheck Protection Program direct forgiveness portal
- Forbes Advisor (3/18/23) — Quantitative easing explained
- Federal Reserve Bank of St. Louis (4/12/23) — M2 (M2SL)
- Barron’s (3/29/23) — China, Brazil strike deal to ditch dollar for trade
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.