The world is not dedollarizing
The dollar is always said to be on the brink of collapse, but that’s just not the reality we’re seeing.
Every few months, there’s a surge in talk about dedollarization, often triggered by U.S. financial instability, China’s trade moves, or some academic dream of a new global currency system. Yet, much like other financial predictions, the actual situation tends to be less dramatic than anticipated. Recently, we were reminded of this. Despite its flaws, the dollar continues to be the asset that the world turns to when challenges arise.
This time, the situation escalated following an Israeli airstrike deep within Iran. In response, the Dollar Index rose by 0.52% last Friday, breaking a two-day downward trend. The dollar gained 0.46% against the yen and 0.23% versus the Swiss franc. Even the euro, which had been climbing for four consecutive days, dipped 0.35% to $1.1543.
Meanwhile, gold—always the dollar’s steadfast partner—saw an increase of 1.26% to $3,425 per ounce. Brent crude oil also jumped by 5.62% to $73.27 per barrel. Regardless of how analysts report on a multipolar world, the facts suggest a different narrative: panic still resonates among Americans.
Treasurys: If not god, still a royal
Last Thursday’s $22 billion 30-year bond auction was not expected to impress. Surprisingly, it “stopped” at a yield of 4.844%, which was below what the market had at the time. Afterward, yields fell by 8 basis points, though in many instances, primary dealers—often seen as the last resort—managed to secure only 11.4% of the auction.
This contrasts with the dismal 20-year auction back in May, where the market was notably less encouraging. This time around, the vigilantes grumbled before eventually buying in.
Sure enough, on Friday, it climbed again, reaching 4.42% over the past decade and peaking at 4.91% for 30 years. Yet, these fluctuations were largely driven by shifting energy prices and worries that an escalation in the Israeli-Iran conflict could negatively impact global growth, rather than a shift away from U.S. debt.
Bearish, I’ll act
A survey from Bank of America in June revealed that the “dollar shortage” is a hot topic among global fund managers. However, their actual positions tell a different story. Many are still holding onto U.S. dollars. Why? Almost 90% of worldwide foreign exchange transactions involve the dollar. Additionally, 59% of central bank reserves globally are still in dollars. This is largely because commodities—ranging from oil to soybeans—are still traded in dollar terms.
As for the euro? It represents a coalition of 20 governments with diverse fiscal policies that aren’t aligned. Then there’s the yuan—its convertibility is dependent on the decisions of the Chinese Communist Party. Enough said.
Even the BRICS coalition, which proclaimed its intent to create a dollar challenger last year, has quietly settled back into traditional trade patterns.
The throne is broken and not empty
The financial outlook for America isn’t particularly thrilling. The Congressional Budget Office projects a deficit exceeding $1.5 trillion annually by the decade’s end, with national debt expected to rise above $45 trillion by 2033. Notably, Moody’s stripped the U.S. of its last AAA credit rating just last month.
Nonetheless, none of this seems to deter buyers. Treasurys remain in demand. The dollar stays resilient, even in the face of bad news. When tension escalates, capital still gravitates back towards its sovereign leader.
While critics of dollar supremacy might frequently voice their concerns, the fact remains: dollars still have the upper hand.
