No, the Dollar is Not in Danger — For a simple reason: there’s nothing to take its place.
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Note: The following is not a word-for-word transcript. For that, please see the episode on YouTube.
The dollar is back in the news, as it has been every few months for the past, oh, three decades or more. Consider some recent headlines.
MarketWatch
4/17/23
“The US dollar is under fire from rival nations. What happens to markets if the greenback loses its world dominance?”
Yahoo Finance
4/14/23
“US Dollar Slips to One-Year Low: ETFs to Gain/Lose”
Now, for some perspective, consider the following CNBC story from a decade ago.
CNBC
10/14/13
“Default Fears Put Dollar’s Reserve Status at Risk”
From that story comes a take that should be familiar, if you’ve followed recent news. Here’s a quote from the decade-old CNBC story:
“Anxiety over a potential US debt default has led some analysts to question whether the greenback’s days as a global reserve currency are numbered.”
But that was then, you might think, and this is now. Maybe the dollar survived that scare, but it might not survive this one. The dollar is in danger.
Before I provide some background, here’s a preview:
No, the dollar is not in danger.
The big picture is no different today than it was through the past umpteen dollar scares since the Reagan administration. You know why?
Because there’s nothing to take the dollar’s place.
Let’s go to a recent call about this issue.
Today’s call is from Michele Garner in Cape Cod, Massachusetts, whose brother is worried about the end of the US dollar as the world’s reserve currency:
Brother thinks with all the US debt countries will stop using the US dollar for trading. This will make the dollar worthless and therefore stocks worthless.
This is a repeating bearish warning, and as baseless today as it was every time I covered it in the past.
I’m not sure why it holds such appeal, but it’s easy to dismiss.
I’ll turn to last March 27th’s Note 13 as to why. From that letter’s “The Chase” section, which is the upfront executive summary of each Sunday letter’s contents. From The Chase of last year’s Note 13:
“It’s back: the baseless alarm that the dollar will lose its reserve currency status. As ever, all you need to know is the following:
“The dollar will not lose its reserve currency status, for a simple reason: there’s nothing to take its place.”
The feature article in last year’s Note 13 was titled “The Dollar’s Reserve Currency Status.” It began by referring back to the idea that there’s nothing to take the dollar’s place, as reported in Note 28 sent 7/11/21.
Why do I refer back to so many previous references to this idea?
To illustrate that it’s nothing new, just an apparently evergreen bearish scare point. It comes up anytime there’s a surge in government spending, a wave of fascism accusations, or a claim by hopeful Chinese analysts that a change of the international order is inevitable.
Back in September 2020, Ray Dalio, founder of Bridgewater Associates, believed the dollar’s reserve currency status was in jeopardy because of the measures the US had taken to support its economy through the pandemic.
Because he’s a big shot in the financial world, people said we should listen to Dalio, a “smart guy” and run from US assets.
I noted that the US had experienced social unrest for four months, but the dollar had not so much as wobbled on its perch. The country had been hit by hurricanes, wildfires, and pandemic arguments, but not once had the reign of the dollar looked tenuous. I concluded, quote from Note 28 sent 7/11/21:
“Through the vicissitudes of politics, social movements, and technological innovation, the Federal Reserve has remained a rock of stability. It even withstood direct attacks on its legitimacy by presidents demanding accommodative policies, and not just from the current administration. It is one of America’s most reliable institutions, indeed one of the world’s. Its steady hand on the tiller is not something the world will easily abandon.”
In 2021, data from the International Monetary Fund showed global foreign exchange reserve composition to be as follows:
2021 Global Foreign Exchange
Reserve Composition (%)
– – – – – – – – – – – – – – –
60 US Dollar
20 Euro
10 Other
6 Yen
4 Pound Sterling
It’s a long way from 60 to no longer being the reserve currency. The contender in second place is all the way down at 20, and is a basket case of a currency by comparison. From Note 28:
“Europe is in constant turmoil, a clash of cultures that fails to unite punctilious Germany with freewheeling Greece. Durability of the currency bloc is forever in doubt, a risk more perilous than another batch of Congress critters at the purse strings.”
“Oh, but what about China?” people ask.
China is the most overhyped potential economic leader of all time. It’s miles away from being able to lead the world—on much of anything, but certainly when it comes to reliable currency reserves. Again, from Note 28:
“China? Forget it. The mandarins in charge engage in so much financial flimflammery and opaque reporting that the renminbi could never cut it as the world’s chief currency. They don’t even have enough confidence to let it float freely on the exchange market. You and I will stand at the great ATM in the sky before the People’s Bank of China garners as much respect as the Federal Reserve and the European Central Bank. The renminbi accounts for 3% of central bank reserves, which is about 2.9 percentage points too high, in my view.”
On top of all this, people just plain misunderstand the implications of currency strength and weakness.
At first blush, it seems we should not want dollar weakness. We should want a strong dollar, right? Wrong. You know what was considered one of the drivers of last year’s stock-market crash? Dollar strength.
That’s right. It wasn’t higher interest rates per se, but their resulting dollar strength. Bulls said that the chart to watch for a turning point in the stock market was the US dollar, in hopes of it weakening.
Last year, from January 3 to its peaks in September and October, the dollar rose 18% against the euro and 30% against the yen. The October 3 cover of Bloomberg Businessweek read:
“Can’t Stop, Won’t Stop: The Fed has turned the US dollar into a wrecking ball—and there’s no end in sight to the carnage.”
What’s that, a strong dollar was the wrecking ball? Yes. A too-strong dollar is a problem, and was one of last year’s biggest worries.
October CPI killed that dollar rally, sending it lower ever since, and it might have been commentary on that that caught your brother’s attention. It certainly caught the attention of many bearish analysts, which is funny because they had previously said dollar strength was the problem.
Last November 10, Barron’s reported on why the weakening dollar should bode well for stocks:
“A falling dollar reduces the purchasing power of Americans traveling abroad, but investors are likely cheering the fall. … For one, it means that companies that derive revenue from abroad will see higher profits when they convert sales in international currencies into the greenback. … In the S&P 500, some 30% of company revenue is earned abroad.
“Secondly, if the reaction to inflation data leads to a sustained downward move for the dollar, it could also suggest that investor concerns about the economy are diminishing. Global investors tend to rush to havens like gold and the dollar when their concerns about macroeconomic issues rise.”
Michele, your brother mentioned high US debt as a possible reason for the world to reject the dollar as its reserve currency, but this is another old issue that has yet to matter. Very old, actually.
America’s national debt has been rising my whole life, and I was born in 1971. It’s been called a crisis in the offing ever since I paid attention, starting in the 1980s. So far, so good, and those betting against stocks, the dollar, and America due to the insane level of debt are lovers of long, long odds.
I agree in spirit: the national debt is out of control. I wish responsible politicians controlled the purse strings. But they never have and never will, and sovereign debt, which is to say country debt, is simply not the same as household debt.
It’s a reason people don’t understand it. They think of it like a credit card balance, but it’s not. The country makes the money that’s used to repay the debt. Talk about a key difference!
I covered US federal debt just last Sunday, in this year’s Note 3, when I looked at the debt ceiling debacle on tap, courtesy of House Republicans led by new speaker Kevin McCarthy.
Drawing on data from Federal Reserve Economic Data (FRED, run by the St. Louis Fed), I reported:
US Federal Debt ($T)
– – – – – – – – – – – – – – –
14.7 in 2011
16.0 in 2012
16.9 in 2013
17.8 in 2014
18.3 in 2015
19.5 in 2016
20.1 in 2017
21.4 in 2018
22.5 in 2019
26.1 in 2020
28.7 in 2021
31.4 in 2022 (Statista estimate)
Yet, in 2021 the US dollar still comprised 60% of global foreign exchange reserves. What happened to it last year? It stayed right around 60%, according to a 9/15/22 report from the Congressional Research Service, “The US Dollar as the World’s Dominant Reserve Currency”.
From that report:
“The dollar has functioned as the world’s dominant reserve currency since World War II. Today, central banks hold about 60% of their foreign exchange reserves in dollars. About half of international trade is invoiced in dollars, and about half of all international loans and global debt securities are denominated in dollars. In foreign exchange markets, where currencies are traded, dollars are involved in nearly 90% of all transactions.
“The dollar is the preferred currency for investors during major economic crises, as a ‘safe haven’ currency. During the global financial crisis of 2008-2009, for example, and amidst the economic turmoil associated with the Coronavirus Disease 2019 pandemic in 2020, investors sought US dollars, expecting the dollar to retain its value. In both crises, the US Federal Reserve adopted extraordinary monetary authorities and currency swap lines with other central banks to provide liquidity and dollars.”
There’s just nothing to take the dollar’s place, high federal debt notwithstanding. And you know why? Because other countries are in just as much debt as the US. It’s not a uniquely American situation.
US debt to GDP is about 125%. Japan’s is 225%. Italy’s is 150%. The European Union’s overall debt-to-GDP is 86%. China’s is 80%—at least, but probably higher when we account for its constant lying in reports.
Nikkei Asia reported on 12/7/22, in a story headlined “China’s debt ratio hits record high at 3 times GDP” the following:
“China’s debt as a percentage of its economy hit a fresh high at the end of June, with local authorities borrowing heavily to underpin an economy weighed down by the central government’s zero-COVID policy. …
“The US, China’s main geopolitical rival, saw its debt-to-GDP ratio temporarily top China’s in late 2020 and early 2021.
“But the ratio has since fallen, coming in more than 30 points below China’s at the end of June, amid an economic recovery as well as interest rate hikes that have hit the brakes on borrowing. America’s future growth prospects also look brighter, thanks partly to immigration expanding its population.”
Which brings us full circle back to the main reason we need not worry about this issue:
“The dollar will not lose its reserve currency status, for a simple reason: there’s nothing to take its place.”
That’s been the case since World War II, and it’s still the case.
To recap:
The dollar’s reserve currency status is not threatened. The stability of the Federal Reserve and America’s economic transparency have no peers. High federal debt doesn’t matter because potential rival currencies come from other high-debt places. Dollar weakness relative to other currencies is no problem for stocks, and in fact is usually the preferred condition.
A threat to American finances bigger than the debt is the absurd debt ceiling debacle used by showboating politicians. Another one of these is on the way this year, but is not going to dislodge the dollar from its perch. Debt ceiling games are more of a problem for Treasuries due to questions they raise about the nation’s creditworthiness. All for nothing whatsoever, I hasten to add.
In short, the dollar’s position in global finance is secure. Therefore, it represents no threat to the US economy or stock market.
Michele, please assure your brother that he can disregard this non-risk.
Sources Mentioned:
US Department of the Treasury. Fiscal Service, Federal Debt: Total Public Debt [GFDEBTN], retrieved from FRED, Federal Reserve Bank of St. Louis
The US Dollar as the World’s Dominant Reserve Currency, 15 Sep 2022, Congressional Research Service, PDF
China’s debt ratio hits record high at 3 times GDP, 7 Dec 2022, Nikkei Asia, article
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