While meme stocks dominated news coverage this week with their wild price swings, the stock market got the jobs report it was waiting for, as May’s payrolls growth came in short of expectations and led investors to conclude that the Fed would not trim its bond buying anytime soon. All three indexes posted gains for the week.
But largely hidden from the news this week, was a startling blow to the dollar. Russia announced that its wealth fund will ditch the dollar taking a first major step in accelerating toward weaning its economy off the US currency. The wealth fund, albeit small, relatively speaking, at $186 billion, will shrink its dollar assets to zero from 35%. While this move is clearly a sign of retaliation of US sanctions, it could be a harbinger of a bigger problem for the US and the world economy – Is the U.S. dollar at risk of losing reserve currency status?
Future Wealth’s View
Recent report from the International Monetary Fund (IMF) shows that ~60% of central bank reserves among 149 countries is dollar denominated. That’s down from previous decades and will likely slip further in the years ahead. By far the biggest threat to the US dollar is the Chinese yuan. The economic rise of the country suggests that the US dollar will be usurped by the yuan eventually, echoing the shift from the British pound to the US dollar in the early part of the 20th century. But China’s currency isn’t ready for prime time as a reserve currency as yet. China has yet to allow free trade of its currency, it restricts capital flows in and out of the country and there is lack of transparency in China’s financial markets.
The only other alternative is the Euro. The Euro was created to be an heir to the dollar but instability, disparate political systems and threat of countries leaving the Eurozone has taken the Euro out of contention. Other currencies like the pound and the yen are marginal players at best. Which brings us back to the big question – will the US dollar lose its reserve currency status and if so, when?
It is fair to say that it is unlikely to happen in our lifetimes. But China and Russia, run by leaders with lifetime appointments, are plotting a longer term strategy that extends well beyond our lifetimes while the US leadership is focussed on a 4 year congressional and presidential cycle. The shift may be imperceptible for now but the yuan may ultimately win