Some of the current cadre of experts in the financial space appear to be clinging to an optimistic view of the U.S. dollar’s position as global reserve currency.
Experts writing for various outlets keep claiming the dollar’s hegemony is fine, with no need for concern that it could evaporate, like water on hot asphalt.
For example, a recent Foreign Affairs piece refers to the dollar as the “preferred currency” and “dominant” while appearing to downplay the share of other currencies:
The dollar is the preferred currency of governments, accounting for approximately 60 percent of central bank reserves in late 2022, compared to the euro’s 20 percent, and the yen’s six percent. Individually, the pound, the Chinese yuan, and the Canadian and Australian dollar represent less than five percent of government reserves. The dollar is also dominant, though less so, in private markets.
Keep in mind that at the global scale, we’re talking about trillions of “currency units” of a handful of nations. That means even a 1% shift represents 10 billion units for every trillion. To put this into perspective, the global economy is currently worth about $100 trillion.
“Nothing to see here – move along.”
Because good things last forever, right?
The U.S. dollar has lost approximately 6% of its share of global reserves in the last 10 years (see chart).
I know what you’re thinking: Look at that rebound from 2021!
Yes, but, that rebound is off the bottom of a multi-decade low:
But this increase came off a 26-year low at the end of 2021. Note that this does not include the dollar-denominated assets on the Fed’s balance sheet, but only dollar-denominated assets held by foreign central banks and foreign official institutions.
…foreign central banks and other foreign official institutions hold U.S.-dollar-denominated assets, such as Treasury securities, U.S. corporate bonds, U.S. mortgage-backed securities, and the like.
Why? The dollar is the default currency used to settle international transactions between nations that don’t share a currency. When an Ecuadorean refinery orders parts from a German factory, they’re usually billed in U.S. dollars. And they pay with dollars. That’s what “global reserve currency” means.
Look at the chart again. Since 2014, each time the dollar recovered a bit, it very quickly returned to its downward trend.
Will that happen again this time? I don’t know. What I do know is that “global reserve currency” status is a highly prized and incredibly profitable role – and a number of competitors are eager to take the throne.
Including the world’s second-largest economy…
China’s efforts to undermine the dollar
After decades of building its economic strength through exports, the People’s Bank of China has an estimated reserve of $3.4 trillion. China owns quite a bit of U.S. debt in the form of Treasury bonds – and, in fact, has been the largest international owner of U.S. government IOUs since 2008.
The Global Times recently reported that China is downsizing its dollar holdings. They make a pretty compelling case:
The reasons behind China's recent reduction of its holdings of U.S. debt are mainly economic considerations, as the problems in the U.S. economy and the changes in bilateral economic and trade relations have increased the need for China to pursue diversification of its foreign exchange reserves.
Now, this diversification effort has been going on (slowly) since at least 2015. Last year, China’s holdings of U.S. debt dropped below $1 trillion for the first time in over a decade.
Whether or not you believe the narrative about “changes in bilateral economic and trade relations,” China is dumping dollars. Slowly and steadily.
And they’re not alone…
World central banks increasingly seeking dollar alternatives
If China were the only country steadily reducing its dollar hoard, we could easily make excuses.
That is not, in fact, the case.
In just the last two years, world central banks have made some historic changes.
So who’s dumping dollars?
Russia’s search for stability after being blackballed from the global economy certainly hasn’t included dollars.
In February 2022, heavily sanctioned and isolated, Russia had to find an alternative to dollar-denominated transactions. The new currency needed two characteristics: It had to be relatively stable and minted by a non-sanctioning country. Of the few eligible options, such as the Indian rupee and South African rand, China’s yuan was the only one actively seeking an international role and able to take it on.
This is pretty obvious – we wouldn’t expect a nation that can’t legally transact in the U.S. to be interested in dollars.
Israel, which is historically the U.S.’s closest ally in the Middle East, is also dumping dollars:
The Bank of Israel has added four new currencies, including the Chinese yuan, or renminbi, to its holdings for the first time in the country’s history, Bloomberg reported last week. The central bank will also trim U.S. dollar and euro holdings in a bid to diversify its foreign reserves, the report said.
Diversifying “for the first time in the country’s history” is a big deal! Why now?
The same reasons everyone else is!
Even Iraq joined other countries in a concerted effort to dump dollars for yuan:
The Iraqi central bank announced on 22 February that, for the first time, it plans to allow trade from China to be settled directly in yuan instead of the U.S. dollar to improve access to foreign currency.
“It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in (U.S.) dollars only,” the government’s economic adviser, Mudhir Salih, told Reuters on 22 February.
These three nations were chosen from a list that includes many more countries that are dumping dollars – including Japan, Switzerland, India, Hong Kong, Singapore, France… It’s a long list.
Now, let’s ask why global central banks are less eager to embrace the dollar than ever before. Is it “changes in bilateral economic and trade relations,” or something more?
I have a theory.
This excerpt from Tim Barker, who reviewed Paul Volcker’s 2018 book Keeping At It, explains my theory very succinctly:
…the United States had delinked the dollar from gold. Without the money supply anchored by a scarce metal, the only thing ensuring the soundness of the dollar (and, therefore, its role as the world’s reserve currency) was effective anti-inflation policy. [emphasis added]
During the 1970s, the last time inflation ravaged the U.S. economy, nobody wanted dollars! After Volcker finally crushed stagflation and ushered in an age of economic prosperity, the dollar’s share of the global market stabilized and began to recover.
I don’t think that recovery can happen again. In the 1970s, there was simply no reasonable replacement for the dollar.
Today? Both the yuan and the euro could easily replace the dollar. Even the International Monetary Fund’s “Special Depository Rights” (SDR) currency could replace dollars overnight.
Now that we’ve established what’s happening, and possibly why it’s happening, let’s ask another question…
What are global central banks buying with their dollars?
The global gold-buying binge
Central banks all over the world have also been buying up gold to add to their reserves. In record quantities.
What is driving central banks to invest in gold?
Here’s my theory again:
Without the dollar supply anchored by gold, the only thing ensuring the soundness of the dollar is effective anti-inflation policy.
That “effective anti-inflation policy” is in tatters now. Inflation breached the Fed’s 2% target in March 2021 and right now, nearly two years later, inflation is over three times higher than the Fed’s target.
Global central banks don’t want to be stuck with dollars that lose value every month! Who can blame them?
Central banks know that physical gold isn’t an ideal way to pay for international transactions. That’s not what it’s for – rather, it’s a store of value that can’t be depreciated by printing presses. You’ll note the word “diversifying” appeared a lot in the discussion, as well – central banks want to diversify their reserves, just like we do.
Now, there’s a lot of things central banks can do that you and I can’t – but when it comes to diversifying our savings away from dollars, into safe have store-of-value assets like physical gold and silver, we can follow their lead.
You don’t have to be a central bank. You don’t need to build an underground vault. You don’t even need a multi-billion-dollar budget. Here at Birch Gold, we specialize in helping everyday American families diversify with physical precious metals – empowering you to do what global central banks are doing right now. If you want to learn more, it’s easy to get started here.
Because, if you don’t have an effective anti-inflation policy, you’re probably going to want to diversify with gold.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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