Investment Strategy Brief:
De-throning the Dollar?

Below is a transcript of this week’s video.

Hi, this is Ilona Vovk with Investment Strategy at Glenmede.

After the U.S. and its peers began imposing sanctions on Russia for its illegal war in Ukraine, and China beginning efforts to internationalize the renminbi, talks about the demise of the dollar have risen. Talks about the potential unseating of the dollar have risen. However, arguments against the dollar are nothing new, as the dollar’s status appears to be questioned each decade. Negative dollar sentiment arose in the 1970’s due concerns of the Fed’s inability to control inflation, in the 1980’s due to the rise of Japan and in the 2010’s due to the 0% interest rate policies. Despite each of these tribulations, the U.S. dollar has remained rather resilient.

It will likely take more than conflict or geopolitical events to unseat a dominant currency. De-dollarization isn’t likely to come from geopolitical competition alone. In fact, changes in dominant currencies have historically come from innovation, possibly accelerated by geopolitical events, rather than a single event. If the dollar is to be unseated, it will have to be over a long period of time by an alternative system that provides more benefits than those secured by dollar dominance—and at a lower cost.

When we look at the current state of the dollar on nearly every available metric, the U.S. dollar dominates global finance. The dollar makes up 59% of global foreign exchange reserves. 64% of foreign debt issuance is done in U.S. dollars. The dollar is highly convertible and makes up 89% of currency transactions for global commodities contracts. Other reserve currencies, such as the euro or the yen, fall short of these numbers. The renminbi is hardly comparable to other reserve currencies.

Although there may be legitimate concern over the dollar dominance, this dominance provides benefits on several levels; that is how it has become so entrenched in the first place. Dollar dominance provides a predictable and transactable system for countries where businesses operate in less stable currencies. Countries experiencing severe currency volatility have seen their citizens turn to the U.S. dollar. Historically, in the face of hyperinflation or economic collapse, entire economies can switch to the U.S. dollar. Ecuador adopted the U.S. dollar as its official currency in 2000 in response to a financial crisis, and as early as 2019, the Lebanese economy began dollarizing amid the country’s economic crisis.

But, if we look historically, the dollar is sharing the reserve stage a bit more than it has but does not appear close to ceding its leadership. The dollar's share of global reserves has declined gradually over the past 20 years as central banks diversified their holdings, mostly into the euro since its introduction in 1999. Allocations of reserves to other currencies, have gained modestly as well but overall, the dollar still represents about 60% of global reserves, a modest decline from 70% over 20 years ago.

But that’s not to say that the dollar has not declined versus the trade weighted basket of major currencies. Just this year the US dollar declined 3.6% since it’s relative top in March of 2023. And declined nearly 9% since the height of the dollar in September of 2022 against the trade weighted basket.
The recent dollar weakness has provided support to international equities, as the dollar has decline from its 2nd standard deviation high shown on the left chart. Now, if we look at the chart on the right, we are showing annualized equity performance from 1973 for either the full period or periods during a weakening dollar. International equities* have posted an annualized 35.3% return during months of a weakening dollar since 1973, compared to 17.6% for the S&P 500.

So, to summarize, concerns about the dollar’s displacement as the reserve currency are not new to markets, yet the dollar has proven rather resilient. The dollar’s status as the leading reserve currency comes from its size, liquidity, transparency, stability, and easy of transaction. Although the dollar has been sharing the stage with other currencies, it is still used in 89% of currency transactions and 59% of global foreign reserves. While unlikely to be dethroned near-term as the leading reserve currency, the dollar has been modestly devalued over time by monetary policies. Near-term, the dollar does appear to be reversing recent outsized appreciation, which is likely to prove a tailwind to international investments.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.

This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.