The dollar is still emperor but where are the clothes?

More countries, the BRICS and South East Asian nations, are calling for more alternatives to the American Dollar.

There are also vocal, activist type investors who are predicting the rapid demise of the dollar. This makes me think of Mark Twain’s reply after reports were published that he had died. His famous retort was “The reports of my death are greatly exaggerated” and it is worth noting, although the past is no guarantee of the future, that anyone who bet against the dollar since the War of Independence would have been decimated. I also point out to dollar detractors that they are betting against a 27 trillion-dollar economy.

The biggest threat to the dollar is not the Yuan or Bitcoin. It is the cancer of big government and creeping socialism – but, ceteris paribus, surely one would expect “free” market economies to win over communist, socialist and command ones.

The dollar is still dominant in capital allocation decisions by the worlds central banks but it is declining.

In 1999 its share of central banks reserves was over 70%, its now 58% with the Euro at 20% and the Chinese Yuan at less than 3%. The JPY and GBP sit around 5% each.

Its more worrying when you look at global trade. China is the largest trading partner to 61 countries when combining imports and exports. The U.S. is the largest trading partner to 30 countries.

Fitch Solutions says dollar dominance would be a “slow erosion” and not a “paradigm shift”.

China is the largest trading partner of most economies and as its economic might continues to rise it will exert more influence. Another reason is that several economies want to diversify. Russia, an extreme example, wants to de-couple and have nothing to do with the dollar. The BRICS want to diversify away from the dollar as soon as possible but the entrenchment of the dollar makes this very difficult. Also, the rise of crypto currencies will to some extent at least provide one alternative to not just the dollar but all currencies.

But there still simply is no clear alternative to the dollar.

The global economic structures continue evolving but rising interest rates in the U.S. and rates that will remain higher longer will certainly underpin the Dollar. Although the U.S. economy remains very strong, the rise of China and the use of alternative currencies may result in a slight decrease in the dollars importance. But to recall Mark Twain’s sentiments it certainly is very premature to start drafting the Dollars obituary.

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By William Meyer – 079 624 4031