It’s all about the Benjamins! The dollar is far and away the dominant currency in the global financial system, but it doesn’t mean the value of the dollar won’t fluctuate up and down. Pure’s Executive Vice President and Chief Investment Officer, Brian Perry, CFP®, CFA® charter, AIF®, answers a few questions regarding the US dollar and its impact on global markets:
- How are the world’s currency reserves allocated?
- The U.S. faces challenges. Is its share of global currency reserves collapsing?
- News headlines say more international trade is going to be conducted without the dollar.
- Does that mean countries are going to swap more goods and services in other currencies?
- Is the dollar dominant in global financial markets? Will the BRICS replace the dollar?
FREE GUIDE | Beyond Borders: Global Investing
Transcript
Hello again, Brian Perry, Executive Vice President, Chief Investment Officer of Pure Financial Advisors coming at you today. It’s all about the Benjamins! That’s right we’re going talk about the dollar. This is a follow-up to a video that we did back in May and we’re still getting questions about the position of the dollar and the global financial system, and we wanted to answer some of those questions.
How are the world’s currency reserves allocated?
For starters: how are the world’s currency reserves allocated? You hear a lot of talk about are people going to leave the dollar and store their currency reserves in an alternative currency. The answer, so far, no. So far when you look at this share in the dollar, almost 60% global reserves held in the US dollar, more than three times as much as the follow up currency of the euro. At less than 20%, a lot of people talk about what about China. Are all the currency reserves going to go there? You can see only 2.6% so China has a long way to go there before catching up with the US dollar.
The US faces challenges. Is its shares of global currency reserves collapsing?
Well what about the dollars challenges? Right the US has all kinds of things going on. US political turmoil, economic volatility, or it’s US share. It’s 60% of total reserves but is the share collapsing again? The answer is no. You can see it has trended down slightly in the last 25 years but not much and in the last ten years or so been pretty stable, so the dollar share of global reserves is extremely high and remaining relatively steady. Not to say it kind of decline a little bit over time, but there’s really no alternative to the US dollar right now. The eurozone as we all know has its own issues and those countries aren’t necessarily all on the same page with their approach to finances and economics they don’t have 250 years of history like the United states does. You look at Japan, they have tough demographics, their economy has been relatively stagnant for 30 plus years. You look at China, their currencies not freely convertible. If you want to have reserves the whole point is you’re saving those for a rainy day you want to be able to take them out. China the one not fully convertible makes it very, very tough to have it as a reserve currency well.
Does that mean countries are going to swap more goods and services in other countries?
What about the news headlines that international trade is going to be conducted without the dollar. You hear Russia and China talk about doing trade among themselves or whatever, right? Does that mean other countries are going to swap their goods and services in other countries currencies? So far, no. The blue bar here is the share of trade in each region of the world done in the US dollar. You can see in the Americas, so North America, Latin America, almost 100% of all trade is done in the US dollar. You look at Asia Pacific, home of China and Japan, still 75% of trade done in the US dollar. The rest of the world again, almost 80%. The only regional region of the world where the dollar is incompletely dominant for trade is in Europe where much of the trade is done in the euro. And, of course, that makes sense if you’re Germany and France and you’re doing trade across those borders, well you have the common currency of the euro, so why not use that?
Is the dollar dominant in global financial markets?
This is the share of foreign currency debt issuance the blue bar again is the US dollar more than 70% of foreign currency bonds issued are issued in the United States dollar. Again, dominant with the euro being in second place, the pound, you see the renminbi, the Chinese currency you can hardly even see it on there. Again China you can say maybe they’re coming for the US maybe not but from a financial markets and currency perspective they might be coming but they’ve got a long, long way to go.
What about the BRICS?
Speaking of China, the BRICS; Brazil, Russia, India, China, South Africa, five big emerging market countries linked together somewhat in a loose organization. They come and they have meetings. Recently, they had a meeting and said, “Hey we’re going to add another half a dozen members. We’re going to add Saudi Arabia, Iran, Egypt, Argentina. We’re going add Ethiopia, bring in the United Arab Emirates.” Anybody been in Dubai, it’s nice there, lots of glitter, right. Are these BRICS nations going to issue a currency? Well the president of South Africa says they’ve never even talked about it. And if you think in order to issue a currency you need to have common economic policies. Well, what’s going on in Brazil, may not be the same as what’s going on in China. These countries would have to give up some of their sovereignty, give up some of their power over their own economy in order to issue a local currency, a combined currency that seems like a long shot. Furthermore, even if they did issue a currency, would you want to buy it? Again China, not freely convertible. Russia, international pariah, locked out of the global financial system because of the invasion of Ukraine. Iran locked out of the global financial system. Brazil, well Brazil has had seven different currencies since the 1980s. Do you want to buy the newest one? Argentina not very long ago had 3,000% per year inflation. We can all complain about things getting more expensive in the US and that’s at 7 or 8%. Imagine 3,000%! You better go shopping at lunch because by dinner things are going to be more expensive. Ethiopia is one of the poorest countries on earth. I could go on and on. These countries all have their own issues, many of them don’t even get along that well, so when it comes to the BRICS, we think a lot of hyped not a lot of substance behind it. We don’t think of BRICS currencies coming for the US dollar in fact we don’t think anything ‘s coming for the US dollar. It’s all about the Benjamin’s! The dollar is far and away the dominant currency in the global financial system that’s not going to change. It doesn’t mean the value of the dollar won’t fluctuate up and down it was down last year so far this year it’s up.
As an investor there are pros and cons to both a stronger US dollar. As well as a weaker US dollar and neither is good nor bad, but we do not think the dollar is going to collapse and we don’t think any other currency whether a traditional currency or a digital currency is coming for the US dollar in place anytime soon. For more on this or anything else visit purefinancial.com.
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