1. Newsroom
  2. Webinar: the investment consequences of dedollarisation
Menu
洞见 24.05.2023

Webinar: the investment consequences of dedollarisation

Webinar: the investment consequences of dedollarisation

During our last webinar focusing on the much-discussed idea that more and more countries are abandoning the US dollar as a reserve currency, UBP’s senior strategists shared their thoughts on the combination of cyclical and structural factors that should indeed lead to a weaker dollar, and the impact this will have on asset classes.


Get some insights about the webinar by listening to this podcast discussion between Norman Villamin, Group Chief Strategist, and Peter Kinsella, Global Head of Forex Strategy at UBP.

Listen and subscribe to our podcasts on these platforms:
spotify.png  apple-podcast.png  Google-podcast.png

The population of the United States accounts for 3% of the world’s total population and its economy represents 15% of world GDP. Yet, for decades, the USD has been the dominant reserve currency and a major reference for global trade; it is used in about 90% of all foreign exchange transactions.

We are beginning to see state-driven moves to reduce dependence on the dollar in trade, invoicing and financing. Recent bilateral trade agreements between China and Saudi Arabia, and Russia and Brazil have brought the theme of dedollarisation back into the limelight. However, these bilateral agreements do not amount to much in the short term, and there are doubts about their long-term effects. In this area, the leadership of the USD is still far from being challenged.

The decline of USD’s reserve currency status

That said, central banks’ use of the dollar as a reserve currency has been gradually diminishing since 2000, with its overall share of allocated foreign exchange reserves falling from 70% to 58%. In real, valuation-adjusted terms, the decline has been even more impressive: in 2022 alone, its use as a reserve currency declined from 55% to 47%, with the euro increasing its share to 25%.

This significant move can partly be explained by the sanctioning of Russia’s central bank’s foreign exchange reserves. This unprecedented decision led several central banks to conclude that they could face confiscation risks in the event of political disagreements with the United States. As a result, some institutions, particularly in emerging markets, have heavily divested from the dollar. In total, central banks bought a record of more than 1,000 tonnes of gold in 2022.

“It is a watershed moment for the USD in terms of reserve composition, of which the euro should be one of the prime beneficiaries.”

Peter Kinsella, Global Head of Forex Strategy

A number of other factors are weighing on the dollar. Some are cyclical in nature, such as the steepening of the US 2–10-year yield curve. Structurally, the fact that the US twin deficits (fiscal and current account) are now approaching USD 2 trillion, or 10% of GDP, is another big driver for further weakness. This combination of cyclical and structural factors, along with the decline of dollar’s reserve currency status can be expected to have a lasting impact on the currency in the coming years.

The investment implications of a weaker dollar

Since the 1960s, there has been three long-cycle USD bear markets, each lasting 10–15 years; a fourth cycle is probably already under way.

Previous cycles show that USD weakness is unevenly distributed across national currencies, making active currency selection very important. History also shows that gold outperforms equities in inflationary/reflationary environments, whereas equities outperform gold in disinflationary environments. Within equities, non-US equities tend to outperform US equities in a long cycle of dollar weakness. The inflation backdrop is also important from a sector perspective.

“Whether the weak USD is cyclical or marks the beginning of the end of its reserve currency status, the implications for investors are the same: they need to look beyond US equities to find investment opportunities, and selection is key to adding value.”

Norman Villamin, Group Chief Strategist.

Emerging currencies are benefiting from worldwide deglobalisation

Another point made during the webinar was the diversification benefits that could come from investing in emerging markets in an era of dedollarisation. “Emerging markets are benefiting from the global deglobalisation that is moving production closer to the US, with Mexico and Brazil as the main beneficiaries, and the same trend is occurring with Europe and Eastern Europe. In addition, with nominal rates between 8% and 16% in emerging markets, exposure to emerging currencies offers a real carry advantage,” notes Sergio Trigo Paz, CIO & Head of Emerging Markets Fixed Income.

Download our report on dedollarisation
Norman Villamin Norman Villamin
Group Chief Strategist
请在LINKEDIN了解他更多
Peter Kinsella Peter Kinsella
Global Head of Forex Strategy
请在LINKEDIN了解他更多
Sergio Trigo Paz Sergio Trigo Paz
CIO & Head of Emerging Markets Fixed Income
请在LINKEDIN了解他更多
Apostolos Bantis Apostolos Bantis
Investment Specialist
请在LINKEDIN了解他更多
Expertise

Global equities

Invest in companies with superior and sustainable value creation.


延伸阅读

洞见 27.03.2024

Four reasons to consider global SMID caps in 2024

As the “Magnificent 7” generate risks in the segment, diversification within equities becomes key. Global small- and mid-cap (SMID) stocks, represented by the MSCI World SMID Cap Index, are emerging as a compelling option.

洞见 14.03.2024

India: A New Driver Emerges

Driven by Prime Minister Narendra Modi’s economic programme, India has embarked on a phase of infrastructure investment akin to China’s in the 1990s. In our latest edition of UBP Headlines, our Group Chief Strategist Norman Villamin takes a deep dive into the booming Indian market, exploring its investment opportunities.

洞见 12.03.2024

Why Swiss equities should be considered in every equity allocation in 2024

Investors may find the strong fundamentals and stable economic, political and social aspects of Switzerland attractive in terms of equity investments in a year which may be dominated by geopolitical newsflow.