April 15, 2024

Is the dollar losing its dominance? Portfolio manager says, 'absolutely we are'



Published May 17, 2023, 5:20 a.m. by Liam Bradley


news finance - Is the dollar losing its dominance? Portfolio manager says, absolutely we are.

The dollar has been the world’s reserve currency for decades, but its dominance is now being challenged.

That’s according to investment manager Raoul Pal, who told Yahoo finance that the greenback’s status is “absolutely” at risk.

Pal, who is the co-founder and CEO of Real Vision Group, said there are a number of factors working against the dollar.

First, there’s the growing debt burden of the United States. The country’s debt-to-GDP ratio is now above 100%, and it’s only expected to grow in the years ahead.

Second, there’s the Federal Reserve’s quantitative easing program. The Fed has been pumping money into the financial system through asset purchases, and this is devaluing the dollar.

Third, there’s the rise of China. The Asian country is now the world’s second-largest economy, and it’s been working to internationalize its currency, the renminbi.

All of these factors are leading to a decline in the dollar’s dominance. Pal said that we could see a “multi-currency world” in the years ahead, with the dollar, euro, renminbi, and other currencies all playing a role.

This could have major implications for investors. For one thing, it could lead to higher inflation. Pal said that investors need to be prepared for this by investing in assets that will benefit from higher inflation, such as gold.

So, if you’re worried about the dollar’s decline, it might be time to reconsider your investment strategy.

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treasury secretary Janet Yellen issuing

a warning this week about the dollar

amid the debt a showdown in Washington

ahead of her trip to Japan for the G7

meeting she said that a default could

have an adverse impact on the dollar as

a World's reserve a currency and it also

comes at a time where it's already under

threat amid the rise of the Yuan joining

us now we want to bring in double line

Capital portfolio manager Bill Campbell

who just wrote a paper on this topic

Bill you're the perfect person to speak

to about this so we talked about the

time right now where we are in a period

of Rapid Global change are we starting

to see already the dollar lose its

dominance and how so

uh well first of all thank you for

having me and I would say absolutely uh

we are we've actually been seeing this

for a while uh but I would like to

expand the thinking on uh you know the

reserve currency status from you know

the crown being handed from one country

to another uh to uh moving instead to a

system of bilateral payments where I

think what we're seeing over the past

several years and increasing this year

is countries are signing memorandums of

understanding such as between Brazil and

China where they're agreeing to

disintermediate the dollar from the

settlement of their trade and investment

and instead uh you know settle in their

own currencies and this has multiple

benefits for the countries outside of

the United States uh you know the most

obvious is that savings when you export

a good or a service and you receive a

foreign currency you need to figure out

what you're going to do uh you know with

that foreign cash and most of the time

uh you're going to go and buy a

financial asset in that country and what

we've seen over the past several decades

is many Emerging Markets have uh really

moved themselves out of low-income

status to Middle income status they've

developed Broad and diversified

economies they've seen Capital deepening

meaning they've seen their financial

markets grow where they have domestic

debt markets and strong domestic Equity

markets and in a way this is a natural

progression to be able to settle trade

in your own currency and then have uh

your trading partner be able to invest

back into your country which supports

consumption investment and grow both in

further development uh you know going

forward so that that's what's happening

uh in addition to some of the cyclical

factors that you know we're seeing yeah

and Bill to a certain extent we've been

talking about the potential of the

dollar losing its dominance for some

years now it feels like last year was a

big flash point though when you think

about what happened with Russia how

quickly Western countries were able to

move to freeze out Russia and its assets

can you speak to that and to what extent

that accelerated the thinking of some of

these Emerging Markets he said we can't

just be holding our debt on dollars

anymore

uh you know 100 I think you hit the nail

on the head that uh you know the

sanctioning of Russia debt uh you know

hit on many levels the most obvious of

which is you know the quick

weaponization of the dollar uh you know

that has been uh discussed that

countries are saying wow uh we could

actually have all of our dollar savings

effectively Frozen and unusable but uh

think about it from a US saver

standpoint a lot of uh 401ks a lot of

institutional money managers uh invested

in uh Russian sovereign debt for example

because it's a large part of many of the

international indexes and all of that

money was effectively Frozen and uh you

know defaulted on uh as well so that

actually hurt the U.S saving uh the U.S

Savers uh and U.S retirees so uh you

know from a diversification standpoint

not only from the international but from

the domestic side too uh you know you

start to wonder uh you know uh is it

does it really make sense uh to have all

of our savings tied up in a system that

you know you could effectively be frozen

out of uh you know the final element of

it is when you are dependent on a single

world currency for all trade and

financial settlement uh you lose your

Independence in foreign policy so for

example Europe uh some of the European

nations may not have wanted to take as

aggressive a move as the United States

wanted to uh you know against Russia due

to uh you know energy linkages and

energy dependence that they had with

Russia but in effect they had to because

the United States forced it Emmanuel

macron actually made statements when he

uh flew back from China uh effectively

saying that he lost his independence on

foreign policy uh because of that so for

those three reasons uh you can see why

the you know Reserve currency status is

threatened by that action that was taken

Bill the the natural question here is

who then replaces the dollar I mean the

Chinese Yuan one that people have looked

at but you know I'm looking to your

paper here you've made examples of

Brazil as well as Malaysia how much of

that has to do with the dollar in the US

how much of that has to do with the

pressure coming in from China saying

look

the debt needs to be held in Yuan if you

want these big deals I mean they have

been pushing for that for years

especially through Belton Road

okay uh I think there's several items

there and you hit on some very key

points uh you know first of all uh you

know China absolutely wants to push for

uh you know more settlement uh in their

currency as uh that gives it more

freedom internationally to uh you know

engage in foreign policy foreign trade

outside of uh you know the U.S periphery

but secondly uh you know bilateral trade

uh it goes in both directions so uh you

know as much as uh the there's imports

from China from these countries there's

also from Brazil exports of Commodities

to China then the Chinese hold Brazilian

Ray eyes that Savings of realize gets

reinvested back into Brazil if the

dollar is disintermediated that savings

that the Chinese invest back into Brazil

gets put into their financial system and

eventually Works its way through the

investment and the consumption channels

boosting the economy of Brazil so it's a

symbiotic relationship when you start

looking at a bilateral system of

payments whereby we disintermediate one

single currency as uh you know the de

facto settlement currency and we move

and allow uh countries to settle

bilaterally with uh you know their own

currencies without having to use a third

uh independent currency to settle and

again I think the benefits that you know

are going to be reaped from that uh you

know presents a lot of opportunities for

uh you know International Investment

especially Emerging Market investment

over the coming uh you know years and

decades and I think you know from the

standpoint that over the past decade and

a half the U.S really has been the only

show in town a lot of foreign savings

got uh invested back in the U.S as we've

seen there was uh last year about 25

trillion of portfolio investment from

outside the United States sat in the U.S

but now what uh you know we've seen in

the past year is many local Equity

indices are doing just as well if not

better than the U.S index and if we have

currency weakness uh that's going to be

a tax on uh you know that savings as

well and the change in uh monetary

policy increased monetary policy rates

by the U.S increases the cost of hedging

so what we could see is a lot of that

savings that sits in the U.S going back

home and being reinvested in domestic uh

you know domestic countries uh further

boosting the case for growth for

investment and uh you know for trade in

uh all sorts of countries outside of the

United States certainly big changes

underway in regards to that well Bill

Campbell great to have you double line

Capital portfolio manager

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