The major story since the final weeks of March has been the move by a number of countries ranging from Russia, China, India, and now Saudi Arabia to switch their trade settlement currencies from the global reserve USD to their own individual currencies.
These agreements have largely been bilateral, but it has accelerated with the Ukraine war and China’s growing influence. This has raised eyebrows from many about the status of the US Dollar on the global stage, and the continued value of investments domiciled in US dollars.
As always, Rise will try to provide some perspectives on this in response to a number of questions from our users and in pursuit of our mission to help our users become better-informed investors.
- The US Dollar Is Not the World’s Only Reserve Currency
One of the first things we often have to point out is that the US dollar has never been the only reserve currency in the world. Reserve currency, in this case, is defined as the currencies countries use to settle trade balances, hold central bank reserves and flow to for a safe store of value. By this definition, the Euro, the Japanese Yen, the British pound, and the Chinese Yuan all qualify.
The primary difference between these other currencies and the dollar is the much larger share of world trade conducted in dollars versus the rest. In 2000, 71% of the world’s trade was settled in dollars. By 2022, this number had dropped to 58%. However, that is still far larger than the second-placed Euro (at 20%), third-place Yen (5.5%), fourth-place Pounds (4.9%) and the Chinese Yuan (2.2%) to round up the top 5. So while these shifts will continue to happen as China, India, and other countries control more of the world’s trade, it is not as dramatic as the media makes it seem. The higher the slice of global trade you control, the easier for more countries to accept and do business in your currency. So while the share of trade settled in US Dollars will ebb and flow in the long run, the dollar will always hold sway as a strong, reserve currency unless something catastrophic happens to the US economy.
- The US Dollar Is Still Going to Be In Demand Despite the Switches
Despite some of the announced switches, it is crucial to understand that being used as a trade settlement currency is not the only reason for US Dollars demand globally. One of the advantages the dollar has is that it is connected to a deep, liquid and active securities market tied to it, which makes it fast and stable to do business in and protects you from a decent amount of exchange rate risk. For this reason alone, a lot of the world’s business will always be done in dollars. It’s a bit like a network effect— the dollar is the most massively traded currency and is connected to the deepest liquid markets.
The US economy, its monetary and credit system is also the most trusted globally, meaning that the majority of the world’s central banks, and the banks that rely on them, regardless of which currency they hold reserves in, want to ensure that when they need funds, they will get it. The dollar offers the best chances of that happening. The US also has a long creditworthiness history, which also means that parking money in the US Treasury is one of the few reliable choices for many central banks.
All these will ensure that dollar demand does not drop radically despite the current changes we are seeing.
- The value of your dollar investments is not tied to the dollar being a reserve currency.
One of the mistakes a lot of people make is to think that the main driver of their investment returns is because it is in dollars. That is not the case. Investing in dollars is very beneficial, especially if your local currency is weakening or has high inflation— the dollar will be more valuable over time.
But the real gain in your investment comes from the increased value of the asset due to its performance and economic gains over time. For instance, while the dollar’s share of global trade dropped -13% from 2000 to 2022, the S&P 500 gained over 311% in the same time frame. Several stocks like Domino’s Pizza, Tesla and Apple have gained more than 1000% in the period. As an investor in these assets, the acceptability of the dollar is not why your investment did well. Your investment did well because it gained value; it was domiciled in a strong securities market with a lot of liquidity and a large economy with a strong demand base. As long as these remain true, your investments will still do well no matter what happens with Yuan.
In conclusion, as we continue to navigate the ever-changing financial landscape, we understand that staying ahead of the curve is essential in providing you with the best investment opportunities worldwide. Hence, we are committed to adding additional investments representing the best opportunities for your money, and we look forward to helping you achieve your investment goals.