The Demise of the Dollar: Don’t Hold Your Breath
So let’s look at currency flows, reserves and debt.
The demise of the U.S. dollar has been a staple of the financial media for decades. The latest buzzword making the rounds is de-dollarization, which describes the move away from USD in global payments.
De-dollarization is often equated with the demise of the dollar, but this reflects a fundamental misunderstanding of the currency markets.
Look, I get it: the U.S. dollar arouses emotions because it’s widely seen as one of the more potent tools of U.S. hegemony. Lots of people are hoping for the demise of the dollar, for all sorts of reasons that have nothing to do with the actual flow of currencies or the role of currencies in the global economy and foreign exchange (FX) markets.
So there is a large built-in audience for any claim that the dollar is on its deathbed.
I understand the emotional appeal of this, but investors and traders can’t afford to make decisions on the emotional appeal of superficial claims–not just in the FX markets, but in any markets.
So let’s ground the discussion of the demise of the USD in some basic fundamentals. Now would be a good time to refill your beverage/drip-bag because we’re going to cover some dynamics that require both emotional detachment and focus.
First, forget what currency we’re talking about. If the USD raises your hackles, then substitute quatloos for USD.
There are three basic uses for currency:
1. International payments. This can be thought of as flow: if I buy a load of bat guano and the seller demands payment in quatloos, I convert my USD to quatloos–a process that is essentially real-time–render payment, and I’m done with the FX part of the transaction.
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