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De-Dollarization…A Growing Trend?

September 26, 2023

Weekly we try to come up with topics from the financial media that we find interesting and feel our job to share our analysis with our readers. If you have been reading our writings for any length of time, you know that we are typically talking about macro-economic issues that we think long-term investors should keep on their radars. Obviously, we can’t build a more specific one-size-fits-all sort of investment strategy as we don’t know specifics about all of our readers’ financial situations. Most interesting for us are the situations in which we see a majority of financial pundits leaning one way – and in our estimation it is the wrong way.  If you read our article titled “Developing a Financial Plan B” and at least read the first half of the article, you understand that we are under no illusions that the US dollar is in imminent trouble of losing its world reserve currency status. What’s more, we believe that as flawed as the world’s monetary system is, the US created it – and the US dollar will be the last of the world’s paper currencies to be lost in a hyper-inflationary spiral. Let’s take a closer look…

Let’s take a look at some of the negativity with regard to the US Dollar…

I Googled “Is dedollarization happening” and here’s what I got :

Key Takeaways. The US dollar’s hegemony is in question due to geopolitical and geostrategic shift, including the ongoing Russia-Ukraine crisis. While the dollar has maintained its transactional dominance, some de-dollarization is taking place in FX reserves, Aug 31, 2023

I am not sure what that really means but if I Googled it and found that it was from J.P. Morgan, it must be true, right?

I kept going and found this from Peter C Earle writing from the American Institute for Economic Research:

The dollar, in some shape or form, will likely be around for a long time. Perhaps very long. But by weaponizing dollar dominance and permitting expanding mandates to disorient US monetary policy, the dollar’s fate as the lingua franca of world commerce over the long haul may already be sealed. So long as the political will to moor US fiscal and monetary policies to those consistent with the constitution of sound money remain an inconversable matter, de-dollarization will proceed. And slower or more quickly, the dollar will lose ground abroad.

That is somewhat ambiguous as well - just an overall feeling of – you as an American should be worried. That doesn’t completely resonate with us but he does make a good point about the weaponization of the Dollar’s reserve status. For example, telling the Russians they can’t trade using the dollar anymore and confiscating their US dollars that were deposited in banks we have control of.  That is taking advantage of our status as the issuer of the world’s reserve currency – regardless of what you think of the Russian military aggression in Ukraine. So that is akin to the US shooting itself in the foot with a revolver – sadly not a big surprise – but we don’t think that the overall situation of $ dominance will change soon.

OK, so Google and Chase and the NGOs are making it public knowledge that dedollarization “is happening” to one degree or another. We will speculate as to why they are propagandizing this at a later date. For now, call it the conventional wisdom that we will now refute – so here we go…

Let’s take a look at the last ten-year performance of major currencies vs the US dollar. That should be a long enough window to get a good feel for what is really going on, yes?

Currency                  Ten Year change vs US dollar Sept 2013 to Sept 2023

Australian $                    -31.04%

Euro                                -21.25%

British Pound                  -24.15%

Japanese Yen                 -33.78%

Indian Rupee                  -24.74%

Russian Ruble                 -66.42%

Chinese Yuan                 -16.20%

Brazilian Real                  -54.38%

South Korean Won         -19.44%

…and if you think the ten-year numbers are too long-term and you would like to see if the $ has recently weakened, take a look at the chart of the US dollar over the last six months…

OK – so you get the point. This chart is showing the dollar strength more directly against the Euro – but none of this data supports the de-dollarization theme. Well, the long-term trend may be up for the US dollar, but what sort of things on the extreme may turn that trend? How about the idea that the BRICs countries (Brazil, Russia, India and China) are going create their own currency, trade amongst themselves sans the $ and leave the US out in the cold? Jim O’Neill, the economist at Goldman Sachs WHO CREATED THE ACRONYM BRICs called the concept of a central currency for those countries “ridiculous” and said discussing it was “embarrassing almost.” He is not alone in his analysis of this – and there is NO progress in that imaginative currency materializing. These are four countries with SERIOUS monetary/fiscal issues and weakening currencies.  Are they collectively going to create a strong currency that can rival the US dollar? We don’t think so and we can’t find serious people that do.

That doesn’t really fit the whole “de-dollarization” narrative either. As far as the settling of trades in currencies other than the US dollar – such as India buying oil from the Russians in rubles, understand so far, these currency trades are a last-minute thing. The Indians are storing their trading capital in US dollars. They then decide to buy oil from the Russians, so at the last minute they buy rubles before buying the oil. That shows a little different picture than the financial media calling it de-dollarization. The Indians aren’t storing their wealth in Rubles and the Russians aren’t storing their wealth in Rupees, they are simply transacting from time to time in each other’s currencies. That is not to be ignored, but it also does not portend imminent doom for the $.

One thing on the periphery of the world’s economy that we will be watching closely are the economies such as Argentina that are really struggling. Their currency loses about 10% of its value to inflation PER MONTH. That has caused serious businesspeople to transact in US Dollars causing it to be the de-facto currency of Argentina. Our guess is that they will turn US dollar’s de-facto currency status into official status. Just like Equador in South America, we are guessing they will declare the US dollar their official currency. Now that would REALLY challenge this narrative that the world is walking away from the dollar. This will be interesting so stay tuned!

This is all good news for the average American for the near to medium term. The issues with this strong dollar philosophizing are the myriad of fundamental data points that put dark clouds over the horizon of the LONG TERM for the US Dollar. We talk about these things regularly and will be back on that theme in subsequent weeks. But let’s keep the description of this data succinct for this week’s post and just say that the US government being $33 trillion in debt and ROCKETING higher is good foreshadowing of a more complete analysis. So with that, we will leave you this week with encouragement that at least for now the US dollar doom propaganda is misleading. 

Regards and good investing,

Greyson Geiler