Dollar Domination

Throughout my career in investments, dating back to my first internship in May 1987, the position of the dollar’s dominance has been called into question many times. The current pressure on the dollar may be the most profound questioning of the greenback in our lifetimes. I have always resorted to some basic reasoning as to why the dollar remains the world’s reserve currency. For our flaws and political backbiting, the U.S. is governed by a rule of law; We have deep financial markets and significant commerce that still transacts in dollar terms.

Juxtaposing the dollar to the yuan, yen, euro and even Bitcoin provides the basis of my long-term view. The yuan does represent the currency of the second largest economy in the world, but is there sufficient rule of law and is the economy open enough? The yen represents a much smaller economy and the demographic issue in Japan calls into question their ability to be a dominant economy. When we look to Europe, they have a unified currency, but not a unified government. I have always felt that an economic union might not be strong enough to allow the euro to be the world’s reserve currency. I am certainly not predicting a unified government but given that the union of these countries is a currency, it may not be a sufficiently strong enough bond. Of the regions of the world, the EU does have rule of law and deep capital markets. I always thought the EU could potentially unseat the dollar, if not for their lack of a unifying government which always left me feeling that second place was their likely position.

This brings us to Bitcoin. I pulled up the Bitcoin-dollar cross on my Bloomberg and looked at the trailing 12 months. Bitcoin has been as high as 106,789 and as low as 52,857 and is currently trading at about 86,002^[1]. This is far too broad of a range to be a reserve currency or a store of value. I compared this to the dollar-euro cross and the dollar has ranged from 0.88 to 0.98^[1]. Certainly, a range, but far more stable than what we see in digital currency.

The U.S. should not be complacent that being the world’s reserve currency is our divine right. We would do well to get our debt and deficit situation in order and continue focusing on developing global trade and remaining the world’s largest economy. Certainly, we have witnessed a growing amount of foreign trade in oil and other commodities being transacted in yuan. This will likely increase. Our ability to deficit spend for all of these years has been serially dependent on our reserve currency status. That status will continue to be challenged, and this is one of the major factors contributing to the recent volatility along with the tariff talk. I continue to believe that rule of law, stability and deep capital markets will be the hallmark of a world’s reserve currency and there isn’t another currency ready to take this mantle…yet.

[1] Source: Bloomberg