De-dollarisation
The dominance of the US dollar has been a hot topic in recent weeks. The consensus is that in the long term there may be a trend toward currency diversification. However, the dollar losing its reserve status will not occur any time soon. As mentioned, investors should not look to immediately exit their US dollar denominated investments.
Investors must always consider their objectives, long-term financial goals and risk tolerance before making changes to their portfolio. This week, I would like to highlight a few of the reasons why “de-dollarisation” would be a very slow and certainly not an overnight process.
De-dollarisation is the process of other countries’ moving towards lessening their reliance on the dollar. The US dollar dominates foreign exchange reserves, or assets held by global central banks in foreign currencies. The US dollar has been the dominant currency used for global trading for close to 80 years, since 1944. While the euro has grown in reserves and is the second most held currency, the euro is a supranational currency. No single country in the EU can ensure the stability of the euro. The Chinese yuan also accounts for about 2.5 per cent of reserves.
The second consideration is investors see the US dollar as a store of value. The US has the largest and most liquid financial market. The sophistication of the market along with governance and movement of capital ensures that other countries rely on the US dollar. US Treasuries are seen as the safest measure of an investment and offer stability in times of market volatility. The sheer size of the US capital market along with regulations give investors comfort in the transparency of the market. This will in turn create a demand for US dollar debt.
Finally, in line with the store of value, there is perceived confidence in the US dollar. This confidence extends to relative political stability in the US regarding laws and policies made by the Federal Reserve. Gradually, there will be a shift to a less dominant dollar but even with geopolitical tension this will also take time. The reality is there will always be fluctuation in the value of the US dollar relative to other currencies.
In the long run, investors can diversify their portfolios by seeking global exposure. Investors can look for strong credit quality companies that operate in the global market. This will allow them to have exposure beyond the US market. Before rebalancing your portfolio, revisit your financial plans and seek guidance from a licensed financial advisor.
Christine Rankine is the manager – personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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