Drezner’s World: The Risks of De-Risking
The U.S. dollar has been the world’s reserve currency since the end of World War II. Most countries have used that for their international trading. And it’s been convenient to price global commodities such as oil in dollars as well.
Now, there’s been a trend towards de-dollarization. Countries are increasingly using their own currencies for trade with other nations. For some, that spells and end to the dollar’s global dominance. And it could be a sign of trouble for US investors.
After all, without global demand for dollars, it will be more difficult to export inflation. Americans would have to pay more taxes and live more within their means to pay for government services and imported goods.
However, this narrative may be driven more by the view that the world is de-coupling from the dollar. A more likely scenario is that the rest of the world is de-risking and diversifying from the dollar.
The same nations using fewer dollars are diversifying their currency holdings, largely in those of other large nations. And many central banks have been buyers of gold as well. This trend may be in part to the slowing growth rates in the U.S. overall, which makes the dollar less attractive than in decades past.
That’s also a sign that the end of the dollar isn’t in sight. But trends are changing, and investors may fare better with international investments in faster-growing countries in the years ahead.