The Receding Dependence on the U.S. Dollar
At WHVP, we have been helping Americans diversify their portfolios outside of the USD for over three decades. One of the main reasons we have been doing this is that the value of the U.S. Dollar has been diminishing over the long term. However, the USD has remained the world's reserve currency for a long time, and therefore its strength has been backed by the great demand for its use in international trade. Currently, it makes up nearly 60% of the world's foreign exchange reserve. In the past few years, a few countries have been playing with the idea of becoming less dependent on the USD, and this idea is now not only a thought or threat from countries but deals are being signed to reduce their exposure and reliance on the USD. But what does this mean for the USD and its value in the long term?
Before we begin, we would like to present the graphic from Visual Capitalist below to give some context to the USD throughout history.
What is Changing?
The dominance of the USD in the global economy gives the USA a huge amount of power should another country go against the will of the U.S. or attack an ally of the country. Because of this, whether good or bad, it has caused some countries to view the dominance of the U.S. dollar as a threat to their sovereignty and independence. Therefore, it is sparking in them the desire to reduce the influence of the U.S. on their economy and those they trade with. So what is happening right now that shows countries are looking to move away from the USD?
Last week, the president of France suggested Europe should reduce its dependence on the "extraterritoriality of the U.S. dollar."1 About a month ago, France settled their first gas trade using the Chinese yuan before it was always done using U.S. Dollars.2 This words of the French president seem to be back by their action on trading internationally in a different currency.
Last year we wrote a blog on "The Impact of the China-Arab Summit on the U.S. Dollar," discussing what it would mean for the USD if the oil-producing countries started trading with China in yuan rather than USD. At the Summit, Saudi Arabia said they were open to trading in currencies besides the U.S. dollar. They recently announced a new oil facility using Chinese yuan worth $12.2 billion.3 Further, the Chinese yuan has now replaced the dollar as the most traded currency in Russia. Russian companies issued bonds in yuan worth the equivalent of more than $7bn in 2022.4 While this is a relatively small amount in terms of GDP for the U.S., it is significant in showing that the U.S. is slightly losing its grip on oil-producing countries.
Further in Asia, at a forum in Hainan, China, Malaysian Prime Minister Anwar Ibrahim reportedly stated that China's President Xi Jinping was open to talks about establishing an agency that would assist their countries and others in the region to lessen their reliance on the U.S. dollar and the International Monetary Fund (IMF).5 While it may just be a case of signaling, it is a strong statement as countries move together to create solutions for their dependence on the USD and it is concerning--for Americans--to see the slip in oil being traded in other currencies by both allies and non-allies. The underlining desire is clear; reducing the exposure to the USD is not limited to oil trade. As a further example, Brazil and China agreed to use their own currencies when settling financial transactions.6 While the USD still makes up nearly 80% of Brazil's reserves, the yuan has passed the Euro to become Brazil's second-largest currency in foreign reserves, with a 5.37% holding ending in 2022. It seems insignificant, but it is important to note that until 2018 the yuan was absent from the country's foreign reserves.7 This shows the pace at which China is looking to disturb the dominance of the USD.
While smaller movements, there are other signs that countries are looking to move away from the USD. For example, the United Arab Emirates and India are currently in talks to use rupees to trade non-oil commodities in a shift away from the dollar.8 It is important to see these shifts as these trade agreements from the Gulf Arab oil and gas producers often have their currencies pegged to the USD, but a shift away could mean the desire to be less dependent on the USD for their currencies' value.
What is causing this?
The U.S. monetary policy significantly impacts the global financial system, with the Federal Reserve's decisions having far-reaching effects that can cause financial turmoil--not only in the U.S.--in other economies. Additionally, the global financial system's reliance on the U.S. dollar can create instability in the market depending on how the ripple effects spread. It is worth noting that the United States has a considerable national debt, which raises concerns among experts and economists about its ability to pay its debts over the long term. Especially if the U.S. continues to lift its debt limits as they have previously. Further, the economic sanctions the U.S. government has used in the past were a tool to persuade other countries in one direction or another, and their misuse can lead to de-dollarization, further contributing to currency instability.
Moreover, countries that hold significant amounts of dollars in their foreign reserves face currency risk, which can be challenging and costly to manage. Lastly, it's essential to note that the U.S. dollar's dominance in international trade can create trade imbalances between countries. Because of this, many countries are looking for another way forward, and they are trying to find creative solutions to do so. It leaves the value of the USD in an awkward position for a path forward, either devaluing to reduce its debt burden but not too much to remain attractive to other economies or losing its monopolistic hold as a world reserve currency. The second could have catastrophic effects on the U.S. economy. Both, however, could lead to the further devaluation of the USD.
What Can Be Done
Amidst the shift of foreign countries away from the USD and the effects that may follow, Americans are not left hopeless in taking steps to preserve their wealth's value. One such approach is through international diversification to ensure wealth is not overly exposed to one currency, such as the USD. Investors can find currencies with stable track records that are less vulnerable to political rivalries due to their economic environment. An example of this is the Swiss franc (CHF) because it is the currency of a strong economy and a politically stable, neutral, and independent country.
Further, Americans can begin working with Swiss asset managers to move a portion of wealth offshore for the purpose of diversification and capital preservation. Switzerland's private banking industry is renowned for its expertise in finance and investing, as well as its ability to protect hard-earned wealth. The Swiss franc has a historical reputation as a safe-haven currency, and the Swiss government and central bank are committed to maintaining its value. Switzerland's independence and ability to navigate global financial challenges make it an ideal environment for Americans to move assets offshore to protect against the loss of value to the USD.
As an example of how inflation has affected the value of the Swiss franc, the U.S. inflation rate is 5.0%, and the Swiss inflation rate is 2.9%, and over the past year, it never had inflation over 3.6%, while the U.S. had to fight inflation as high as 9.1%. Switzerland's ability to react quickly with efficient and effective solutions for its economy in challenging times has enabled the Swiss franc to maintain its value despite global financial crises. If you are interested in learning more about moving assets offshore to Switzerland, you can contact us through the link provided here: connect with us.
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