Lots of aggressive tweets with little to show for it.
Story of our time, right?
It’s also the story of de-dollarization which, as discussed here late Tuesday, is trending on social media, but not so much in the real world.
For most of 2022, every incremental nod in the direction of settling trade and conducting transactions in something other than the US dollar was billed as “news,” no matter how inconsequential. Modern day barter arrangements that wouldn’t even constitute rounding errors in global trade aggregates were held up as evidence to support various “new world order” narratives, including those peddled by Zoltan Pozsar, who decided to expand his analytical horizons from funding markets to geopolitics.
In the end, not much came of it all. There’s no “petroyuan” and there’s no “BRICS coin” either. Even the incidence of tweets and news articles is falling, although de-dollarization remains topical.
The figure above, from Goldman, gives you a sense of the bull market in de-dollarization tweets and stories.
What about actual, real-world de-dollarization? Where is it? Nowhere, really. Even the tale of China’s declining US Treasury holdings comes with myriad caveats.
This week, Goldman’s Michael Cahill and Lexi Kanter weighed in via the latest installment of the bank’s “Top Of Mind” publication, which compiles interviews, analysis and charts around whatever the market topic du jour happens to be.
Below, find a few short excerpts (and one chart) from Cahill and Kanter, which underscore the idea that de-dollarization is largely confined to your social media feed and opportunistic media outlets.
Talk of de-Dollarization has reached new highs amid an increasingly fragmented geopolitical landscape and well-publicized efforts from some official sector actors to move away from the Dollar. But actual de-Dollarization is still contained and constrained, as only a few countries have attempted it, with mixed success, and larger reserve managers face significant constraints to doing so. At the same time, private sector investors have continued to flock to Dollar assets given their ‘exceptional’ returns, which has helped sustain the Dollar’s high valuation. And none of this looks likely to change anytime soon.
[Some] have suggested that structural forces, such as the changing global geopolitical landscape and the US’ fiscal outlook that has become more concerning amid the higher-rate environment, could also weigh on the Dollar’s prospects. The Dollar has so far mostly frustrated those prognostications with its persistently high valuation. Rather than de-Dollarizing, capital has instead chased ‘US exceptionalism’ and flowed into US assets during the last decade of US outperformance, and, in particular, exceptional US equity returns. These inflows, combined with the strong relative performance of US assets, have resulted in a sharp rise in the share of US assets in global portfolios.
We strongly believe there is currently no real alternative to the Dollar as the global reserve currency. While the Dollar’s share of FX reserves has declined over the last decade, this has largely owed to increases in currencies like the Australian and Canadian Dollars as investors searched for higher returns — the same forces that have also supported the Dollar — at the expense of lower-yielding currencies like the Euro and the Yen. Structurally, reserve managers tend to gravitate to currencies that are liquid and reliably appreciate in risk-off periods. In this regard, the Dollar still stands alone.
That said, there have been some high-profile efforts to move away from the Dollar. Russia’s experiences with shifting its transaction currencies over the last five years highlight some of the risks facing the Dollar system, but also the challenges facing reserve managers that may want to follow. First, even though Russia moved a relatively small number of reserves compared to what a wholesale global shift would entail, it seemed to encounter liquidity issues while moving into RMB assets from USD assets. Second, these attempts came with additional currency risks that went mostly unrewarded because Europe joined the US in applying sanctions. Reserve managers need highly liquid, reliable, and deep capital markets. And they need to consider what reserves might be required in a crisis. These factors present a high bar to meaningfully move away from the Dollar in the near term. While plenty of countries may want to move away from the Dollar, the arguments to do so are not economically driven, and the alternatives are limited.
