Confidence in the U.S. Dollar Seems to Be Dwindling
The end of the U.S. dollar could be nearing…
This may certainly sound like an overly dire warning, but it is true. Know that this is not just a gut feeling. This argument is backed by a lot of data and developments.
Before going into any details, we have to ask, why is the U.S. dollar so well recognized?
You see, this is because the U.S. dollar is used for global trade and payments, and central banks hold it in their reserves. There’s confidence in the U.S. dollar.
Now, the big question: What do you think will happen if, all of a sudden, major countries around the globe decide to question the way the U.S. dollar is used? It could have detrimental effects on the greenback.
That is what’s happening these days. The value of the U.S. dollar is being questioned.
Look at Russia.
The country’s Prime Minister, Dmitry Medvedev, said that the U.S. actions are incentivizing de-dollarization:
This is probably the paradox of the current situation. And the paradox is that the idea of de-dollarization receives constant incentives from the issuer itself…Obviously, the trend to reduce dependence of national economies on the dollar will only increase. Economic actions such as sanctions and protectionism of the most powerful player in the economic arena only increase tensions.
(Source: “Medvedev: U.S. actions feed de-dollarization idea,” Vestnik Kavkaza, January 15, 2019.)
Russia is also focused on non-dollar denominated trade.
Over the past few years, the country has built a strong relationship with China and is trading with China using the yuan. Russia has even bought the Chinese yuan for its reserves.
Why should you care? Russia is the 12th biggest country in the world and China is the second-biggest hub in the global economy. If these countries are ditching the U.S. dollar for trading, don’t you think other countries will follow?
Central Banks’ Yuan Reserves Increase by 78%
Mind you, we are seeing an emergence of the Chinese yuan as a currency that a lot of central banks and countries are leaning toward.
Look at central banks, for example. They are increasing their Chinese yuan reserves. At the end of the third quarter of 2018, they had $192.54 billion worth of Chinese yuan in their reserves. In the same period a year ago, this figure was $108.16 billion.
So, over a one-year period, their reserves increased by 78%! (Source: “Currency Composition of Official Foreign Exchange Reserve – IMF Data,” International Monetary Fund, last accessed January 21, 2019.)
Dear reader, know that the only thing keeping the U.S. dollar up is the confidence among governments, central banks, businesses, and investors that it has some value. There’s really nothing else beyond that.
The day this confidence breaks, you can say goodbye to the greenback. The examples above show that there are cracks in the confidence. And know that these are not the only developments that show a loss of confidence in the U.S. dollar.
I am watching the U.S. dollar closely. If you follow this publication closely, you will know I don’t believe in the “outright collapse” thesis for the dollar. I believe we are going to see gradual declines in the value of the dollar at first, and then we are going to see selling escalate once it fails to stay strong.
If you hold the U.S. dollar, I’d be very careful in the coming years.