De-Dollarization: Here’s Why It’s Not a Thing

Fearmongers do one thing better than everyone else I know.  What’s that? Spreading fear and conjuring up the latest and greatest rationale for US investors not investing in equities. Harry Dent, Robert Kiyosaki, Robert Prechter, and Jerry Grantham all noted doomers, all horrifically wrong on the outlook for US equities the last decade +.

Since the Covid pandemic ended and the Ukrane/Russian war began one of their loudest arguments for anti-equity and anti-American investment more specifically ahs been something called De-Dollarization.  What is de-Dollarization and should you be losing sleep over it at night? The punch line answer is no do not loose sleep over it. Do not worry about it harming your domestic investments in the next few years, but yes keep an eye on it because it will create opportunities here and abroad.

First off what is De-dollarization when financial folks discuss it? Well, it generally refers to seeing a significant reduction in the use of the U.S. dollar in world trade and financial transactions.  I’m going to refer to the DXY index as the dollar index in this piece as its probably the broadest and most common measurement of the US dollar versus our trading partners and other world powers.

Here are the current weights in the DXY Index of the 6 currencies that make it up:

And here is a 20 year chart of the DXY Index.

In this chart, up and to the right is an indication of the dollar getting stronger versus these trading partners.  That is, our currency being more valuable in trade not less.  And remember investors, currencies are a relative value game whenever you look at them.  One country’s currency is strengthening at the expense of another.

Given the trend in this chart, what makes doomers so loud and vehement about their so far very wrong prediction of the “dollar’s demise”?  Why are many economists and alarmists concerned about the trend away from the dollar into alternative currencies? First and foremost, a less dollar centered world might mean a redistribution of power, influence, and economic leverage away from the US into other countries. It could possibly lead to increased volatility and uncertainty in financial markets.

The most visible proponent of de-dollarization has been China.  Knowing that the holder of the reserve currency of the world has special powers, China under President Xi, as sought to increasingly use its own currency, the yuan/renminbi, for cross-border transactions when it can.  As China tries to broaden its economic power, the rise of the yuan would represent a challenge to the established order of the US dollar as the reserve currency.

In 2010, less than 1% of China’s foreign trade payments were settled in yuan, compared to a over 80% in US dollars. By March 2024, over half (52.9%) of Chinese payments were settled in yuan, marking a doubling of its share in the five years post Covid

Where are there early signs of de-dollarization? In the commodities space, most specifically oil, transactions are increasingly priced in non-USD currencies.  Some of this is due to China’s reliance on Russia for oil and energy but there are also subtle shifts coming out of the Middle East.

Since the Russia/Ukraine war broke out 2 years ago there has been further concerns by our US trading partners of our politicians “weaponization” the dollar and using it as a US foreign policy tool. As a result, there has been a growing interest in finding alternatives to the dollar.

In mid-2023, at the 15^th annual BRICS summit in South Africa, Brazil’s president called for the creation of a common currency for trade between BRICS countries as an alternative to the dollar.  The BRICS countries are: Brazil, Russia, India, China and South Africa. According to Jean-Francois Robin, before the Russia/Ukraine war the share of Russian exports denominated in yuan was 1%, today, as of mid-2023, it is 15%”. Other small data points are that Argentina announcing that it will repay part of its debt in the Chinese currency as well as Pakistan recently denominating oil import contracts in yuan.  Over the last decade, both China and Saudi Arabia have reduced their holdings of US treasuries by over 40%. So mathematically, yes, the trend is slowly away from trade taking place in the dollar. Toward other instruments and currencies. But has it made a difference to US consumers?

First lets look at the US dollar vs another common store of value gold.    Since mid-2015 gold priced in dollars is up about 145%.

Over the same time period? Gold priced in Chinese Yuan terms is up almost 200%

Folks neither currency has been a good store of value the last 10 years but the Chinese yuan has clearly weakened not strengthened against the US dollar over the same time period.  Here’s the Dollar vs. Yuan chart the last 10 years.  Up and to the right is a stronger dollar and weaker Yuan.

Investors, I think it shouldn’t come as a surprise that the Chinese Yuan has weakened against the dollar even as China has tried to diversify outside of US dollar trade.  To me, it looks like the Yuan weakness is highly correlated to Xi movement away from capitalistic tendencies and back toward a more centralized, communist rule.  Investors, your money goes where it’s treated best and most fairly without friction be it taxes or government intervention.

It the US dollar really going to be supplanted by a currency on a Communist or centralized planned government like China?  Or the Russia ruble with Russia controlled by a dictator?  The Brazilian real when that country is struggling?  Any of the countries in the Middle East given the concentration of their economies in the energy patch and tendency for wars in the region?

Recently, with DJT being reelected for a 2^nd term, many in the media have jumped straight to his policy affects on the US dollar. FWIW, here’s an overlay of the DXY in 2016-2017 versus 2024.

So far, the dollar is doing nearly the exact same thing it did in the 4^th quarter of 2016.  Back then it rallied strongly on his winning the 2016 election, however, it sold off in 2017 with the tariff talk, with strong domestic and global growth, and inevitably the weaker dollar helped earnings in multinationals in 2017 leading to higher stock prices.

Investors, I get the need for doomers to constantly grasp at the next “this is the tipping point” moment.  Maybe, they need to sell books, subscriptions, or charting services that worked once and got them labelled a financial guru or “top caller”.  Or maybe they want to generate clicks and views for advertising dollars, but are their opinions or scare tactics helping you and your financial situation?  Yes, there is a movement away from fiat and paper currencies into digital form.

Bitcoin believers see bitcoin as the future store of value and future digital currency.  Given the performance of that asset regardless of what currency its been held in since 2015, it’s hard to argue with them.  It’s up over 45000% since I first heard about it in the summer of 2015.

I can find few “assets” speculative or not that have approached that return. Maybe this is the new global currency even though few trade in it, while many are trading it.

Investors, the world has been moving toward a digital world for the last 50 years.  Moving away from bills to bits and bytes.  Moving aways from coins to Coinbase.  Moving aways from banks and bricks to bits and clicks and swipes.  My sons, 27 and 24 will rarely if ever stop at the ATM to take out some cash on the way out to date night on the weekend. Much less they will never enter a bank lobby unless its to secure a safe deposit box or sign mortgage documents.  Even then? That may never happen with the likes of DocuSign and Adobe e-signature technology.

Investors against the nearing decade long doomer calls from Jeremy Grantham, Harry Dent, Robert Prechter Jim Grant, and a myriad of retired billionaire hedge fund managers that come on CNBC almost monthly to scare viewers.  While the world may try to shift away from dollar dominance, it should be a long road for that movement given the horribly unstable and unfriendly alternatives.  Investors. It’s still a bull market, the dollar is still the default currency of the world, and investors as Martha Stewart says, at least for investors “That’s a Good thing”. https://www.youtube.com/watch?v=fJdrgkR0GcU.