U.S. Dollar Not at Risk of Being Dethroned Anytime Soon
Every year we hear from clients that the US Dollar is on the verge of losing its status as the world reserve currency because of the Fed, fiscal policy, and geopolitical maneuverings of foreign actors. Today the talk stems from articles like this one that argue Brazil, Russia, India, China and South Africa are going to create a new currency capable of dethroning the US dollar.
The good news is that we don’t have anything to worry about in the near term. This article from Schwab does a good job of highlighting the reasons the US dollar is not losing its dominance anytime soon. The below chart is essentially the cliff notes version. No other currency is even close enough in size to exert pressure.
Another fun video on the subject is here. It shows how the world reserve currency has shifted over the last 120 years. Notably the British Pound was the world’s reserve currency up through WWII. In 1945 – the close of WWII, it was 80.2% of the world’s Treasury holdings. Despite the cost of the war nearly bankrupting the country, it wasn’t until 1954 (9 years later) when the US dollar finally surpassed it in terms of percentage of the total. More interestingly, London was the financial center of the world from 1692 until 1914 when the cost of fighting WWI caused it to cede the title to the US. So even when a currency does lose its reserve status, the process takes time.
Finally, and this is probably the most important part, even if the US Dollar was dethroned as the world’s reserve currency, I have no idea how a long-term investor would successfully trade on that information. From 1914 – 2018, the British stock market had average annual returns on 9.74%. This despite two world wars, losing its status as the world’s reserve currency, and all the other notable events that happened along the way. An investor that abandoned their portfolio expecting decades of financial devastation would be sadly disappointed.