In this article Prudential Metals Group helps you understand the future forecast of the dollar with insights and brand analysis, giving you all the information to make informed decisions.
The world is approaching a change
In the monetary system in the face of a dollar threatened on several fronts.
The global dominance of the dollar over the past seven decades is progressively weakening. The absence of solid alternatives has become the greatest ally of the ‘green ticket’ to maintain hegemony in the global monetary system. However, this has not stopped central banks around the world from reducing their confidence in the dollar (to maintain their reserves) in exchange for other currencies or assets.
The monetary system is constantly evolving and little by little it is moving away from the dollar-centric model to get closer to a more multipolar one.However, to understand what is happening, it is convenient to look back and analyze how this change that is now gaining momentum has been fermenting for some time.
The Bretton Woods Agreements in 1944 gave birth to the dollar-centric monetary system, which has been maintained to date. However, major crises in the system have led to significant changes, typically associated with the balance of payments from uncompetitive or troubled countries with the US.
For instance, the US experienced high inflation in the 1970s, which eroded confidence in the US dollar. However, the Federal Reserve, under Paul Volcker, restored credibility by implementing record increases in interest rates. Although the Fed and other central banks have developed tools to limit the consequences of inflation and exchange rates (central bank currency swaps), the risk of so-called systemic changes remains, Credit Suisse economists say in a new report. which analyzes the global monetary system.
The last three years have seen abrupt changes in the global economy, economic policy responses, and the field of geopolitics. Not surprisingly, these changes have triggered strong reactions in financial markets, including money, bond and currency markets. As in previous periods of economic and geopolitical turbulence, the question of whether the international monetary system may be subject to fundamental changes in the longer term has also been raised.
There are many analysis houses that have released notes and reports in which they wonder if the dominance of the dollar is in danger. The majority answer is that in the short term the system will continue to be focused on the dollar, but doubts are growing and there are reasons to believe that we are witnessing a change in the system. To discuss this issue, the Credit Suisse Research Institute has published a comprehensive report and held a conference where various academic and professional experts presented their perspectives on broader political and economic issues.
Fall in world reserves
History teaches us that not only periods of weak US dollar (and US loose monetary policy) can cause problems in the rest of the world, but they can also lead to Federal Reserve tightening cycles and a dollar strong even more devastating.
Today, the US dollar weighs 20 points less in world reserves than it did 50 years ago.
The dollar-centered monetary system has suffered considerable volatility during its nearly 70 years of existence, but it has adapted and survived thus far. Indeed, despite significant liberalization, expansion and deepening of financial markets outside the US, the US dollar has largely maintained its prominence over the past few decades, Credit Suisse economists note.
Relative to the size of the US economy and its role in world trade, the US dollar continues to play a very important role. That said, the weight of the US dollar in central bank reserves has declined in recent decades: “The position of the US dollar as a global reserve currency has weakened dramatically. Currently, the US dollar accounts for just under 60% of the Global foreign exchange reserves are held by central banks, compared to more than 80% in the 1970s,” Credit Suisse experts explain.
What is happening with the dollar?
Swiss banking experts comment that, when assessing the future role of the US dollar in the global monetary system, one should closely monitor possible macroeconomic instabilities in the US. They state that the outlook in this regard is not particularly encouraging.
Inflation has risen sharply in the last 18 months (despite moderation in recent data), while economic growth has started to slow. Thus, the US economy is experiencing stagflation, albeit milder than during the 1970s.”
By contrast, a number of emerging markets, including the increasingly powerful China and other countries in Asia and the Gulf region, are doing significantly better in terms of price stability. The evolution of US (and world) inflation in the medium and long term will depend on the actions of central banks. “So far, it appears to us that the Fed is at least intent on reining in inflation.
Interest rate hikes have been steeper than ever
Albeit from extremely low levels, and market inflation expectations have regressed considerably from its peak in March 2022,” say Credit Suisse experts. However, these experts believe that there may be structural factors that make it difficult to beat inflation, such as the lack of structural labor due to the demographic winter and possibly the shortage of certain basic products. Similarly, chip shortages and other fallout from the US-China trade war and pandemic-related disruptions.
All of these factors have led to extreme volatility and an unusually high level of uncertainty regarding the price level, which has translated into high exchange rate volatility. “The latest moves in this market show that volatility is decreasing, but it is probably premature to give the go-ahead, as the current uncertainty about the evolution of price levels in the main economies could damage the position of the US dollar and other currencies important as stores of value,” says the Credit Suisse report.
The sharp increase in public debt in recent years and the large US current account deficit (it imports much more than it exports) does not help the US dollar either. Credit Suisse experts also highlight this situation, which has worsened in recent years: “Although it is true that countries with reserve currencies ‘need’ to run structural current account deficits to meet global demand for investable assets, Excessively large deficits risk undermining the confidence needed to preserve reserve currency status.”
Freeze of assets to Russia
On the other hand, the sanctions against Russia that have included the freezing of dollar assets may lead other central banks to accumulate assets in other currencies. Regardless of whether the US decision regarding Russian assets is reasonable, many countries may consider that holding assets in dollars implies a previously unperceived risk: their possible freezing if relations with the US deteriorate.
Therefore, the central banks of one part of the world (the non-Western) could begin to diversify the reserves they accumulate to a greater extent.
Expert Analysis & Predictions
What Zoltan Pozsar, an authoritative voice on this type of issue, comments is also important. Credit Suisse’s chief strategist for interest rates is a regular warning in the media of the incipient de-dollarization of the world. In an article published on Friday in the Financial Times, Pozsar notes that geopolitics have altered the existing financial hegemony in which the dollar was indisputable and that this carries risks for investors. He starts from the assumption that the transition from a unipolar world to a multipolar one with a clear fracture in the G-20 will logically affect the monetary system.
According to Pozsar, multiple challenges are already questioning the dollar-based monetary order, with two, in particular, standing out: the spread of de-dollarization efforts and central bank digital currencies (CBDCs). On the first front, that of de-dollarization, Pozsar assures that the phenomenon has accelerated: “In the last year, China and India have been paying for Russian raw materials in renminbi (yuan), rupees and Arab dirhams.
India has put into a rupee settlement mechanism is in place for its international transactions, while China has called on Gulf countries to make full use of the Shanghai Oil and Natural Gas Exchange for yuan settlement of oil (‘petroyuan’) transactions and gas in the next three to five years. With the expansion of the BRICS beyond Brazil, Russia, India and China, de-dollarization of trade flows may proliferate.”
On the CBDC side, they could speed up this transition, according to the strategist: “China has changed the strategy by which it internationalizes the yuan. Since financial sanctions are applied
The great advantage of the dollar is that there is not yet a serious alternative. Yes, the world is approaching a change in the monetary system, but it does not seem imminent. What seems likely is that a multilateral system dominated by different major currencies will be the intermediate process.
The yuan’s weight is increasing at a slow pace, and although Beijing is laying the foundations for what is referred to as the reserve currency of the future, there is still a long way to go.
According to Alicia García Herrero, Natixis’ chief economist for Asia-Pacific, the expectation is for the yuan to gradually assume an increasingly less central role in taking over part of the world’s reserve currency from the dollar. However, its lack of convertibility remains a limitation.
Additionally, experts expect that other currencies of large emerging economies, such as the Indian rupiah, the Indonesian rupiah, and the Brazilian real, will capture some of the market share lost by the dollar.
A multilateral system
With the balance sheets of Western banks, and these institutions form the backbone of the agent banking system that underpins the dollar, using the same network to internationalize the yuan can be risky. To prevent this, a new network was needed.”
“The emerging CBDC-based network, bolstered with bilateral currency swap lines, could enable central banks in the eastern and southern world to act as foreign exchange brokers to intermediate currency flows between local banking systems, all while without referring to the dollar or touching the Western banking system,” says Pozsar.
“It is very likely that we will move from an international monetary system dominated by the dominant reserve currency, the US dollar, to a more multilateral one in which more currencies can serve to be used internationally. The time frame for this change remains long due to the rigidity of international financial markets, but could accelerate with the introduction of digital currencies, especially the yuan, as well as with the evolution of the US economy relative to the rest of the emerging world.
In this context, the structural slowdown of the economy China, in any case, should further slow down the disappearance of the dollar as the main reserve currency, unless the US economy goes even worse”, explains García Herrero. The economist emphasizes the practical impossibility of significantly displacing the dollar by both the yuan and the euro. She points out that in the case of China, the asymmetric financial opening will make it difficult for the yuan to reach a market share commensurate with the economic size of the Asian giant. Additionally, she defends that “there is little doubt that it will not be able to take the market share of the dollar, since the size of its economy is bound to shrink, even in relation to the dollar.”
In line with this, García Herrero is not exactly optimistic with the euro. The analyst emphasizes that credit and equity markets in Europe remain national and comparatively smaller than those in the US, as the eurozone still dominates with bank lending. She also notes the downside of a much smaller pool of safe assets, particularly since the 2010-12 eurozone crisis, which led to downgrades in sovereign ratings of many member states..
In fact, as of today, the pool of safe assets denominated in euros only represents 20% of GDP in the euro area, which contrasts very negatively with the pool of risk-free assets in US dollars.
“In a world of great power competition, in which multilateralism and a rules-based order play a much smaller role, the EU will have a hard time maintaining its economic power, which does not bode well for the future of the euro as a currency international”, says García Herrero.
The Credit Suisse report reaches a similar conclusion, stating: “Our general conclusion is that a gradual evolution towards a more multipolar monetary system is taking place. “A more extreme turn away from the dollar-centered system is a much less likely case,” they conclude. .
Over time, metals have historically been an adequate defense against inflation and taxes, even better than stocks, bonds, and cash. However, the latter limit your exposure based on how much you will need from your portfolio soon, because there will be less time to recover from a bad year in the market. The key is to diversify your portfolio into precious metals because it is the best vehicle to preserve value over time and determine the right mix for you, based on your age, needs and time horizon.
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