Deep Knowledge Investing: The Reserve Currency Status Is Going to Be a Problem
Although the United States dollar has been the world’s reserve currency since the end of World War II, the trend is changing rapidly. A growing number of countries are employing bilateral agreements to use their own currencies for international trade.
The trend increased following Russia’s invasion of Ukraine. Sanctions against Russia included financial ones, led largely by the United States.
With nations seeing the power of being cut off from the dollar, they’re making moves to get ahead of that trend. It’s clear that the use of the dollar internationally is now subject to the views of U.S. policy. That’s in stark contrast to using a currency as a store of value.
Most analysts looking at the shift from the dollar point out that there’s no replacement reserve currency. But there doesn’t need to be. Each nation state or region can use their own currency as they see fit.
That’s why China, home to the world’s second-largest economy, made a deal with Saudi Arabia for pricing oil in yuan. It benefits both parties, and avoids any disruption if they’re cut off from the dollar.
The long-term trend of global de-dollarization continues. Unfortunately, for U.S. citizens, it means that it will be harder to export dollars, and therefore inflation. And it could mean less interest in U.S. investments by international investors, which could weigh on valuations for U.S. stocks going forward.