Central banks are leading a revolt against the US dollar and shifting to gold at a record pace, market expert says
Story by fdemott@insider.com (Filip De Mott) • 6h ago
- Central banks are turning away from the US dollar and shifting to gold, Ruchir Sharma wrote.
- Central banks account for a record 33% of monthly global demand for gold, he said in the FT.
- "Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar."
The anti-dollar drive spearheaded by Asia has spread to Europe, with France growing sour on the greenback's dominance. Here are 6 rising threats to the buck's supremacy of global trade.
- The dollar's supremacy in global trade faces fresh challenges as several countries float plans to use local currencies in commerce.
- Russia and Iran are working to create a gold-backed stablecoin, while France has pursued a trade deal with China in yuan.
- Here are 6 rising challenges to the greenback's dominance of international trade and investment flows.
The dollar's dominance of global trade and investment flows is facing a slew of new threats as more and more countries draft plans to boost the use of alternative currencies.
For some time now, nations from China and Russia to India and Brazil have been pushing for settling more trade in non-dollar units – with projects ranging from the use of local currencies to a gold-backed stablecoin and a new BRICS reserve currency.
Now, even Europe appears to be jumping on the anti-dollar bandwagon, with French president Emmanuel Macron recently warning against the continent's dependence on the greenback.
With movements to undermine the dollar's unipolar supremacy gathering momentum, it comes as no surprise that the buck's status as a reserve currency eroded in 2022 at 10 times the pace seen in the past two decades, according to Eurizon SLJ Asset Management.
Strategists at the asset manager found that the greenback's share of total global reserves fell to 47% last year, from 55% in 2021 and as much as two-thirds in 2003.
For decades, the US dollar has reigned supreme as the world's reserve currency and is widely used in crossborder trade, especially for commodities such as oil. Thanks to its relative price stability, investors see it as a safe-haven asset in times of heightened economic and geopolitical uncertainty.
The dollar was further bolstered last year by a surge in US interest rates that made it attractive to foreign investors seeking higher yields. It surged 17% during the first nine months of 2022, but has since lost some of its shine on the prospect that the Federal Reserve may soon end its rate hikes as inflation cools rapidly.
Against this backdrop come the latest threats to the greenback's reign — here are 6 currency projects from across the world that are ultimately aimed at undermining the dollar's supremacy.
Assurance in the dollar's dominance ignores signs that countries are serious about seeking alternatives, according to Ruchir Sharma.
This is illustrated when taking account of recent trends in gold: the safe haven commodity has surged 20% in the last half year.
But demand is coming from central banks reducing their dollar holdings, not the "usual suspects" made up of large and small investors, the chair of Rockefeller International wrote in The Financial Times on Sunday.
In fact, central banks account for a record 33% of monthly global demand for gold and are buying more gold than at any time since data began in 1950, he added.
"This buying boom has helped push the price of gold to near-record levels and more than 50% higher than what models based on real interest rates would suggest," said Sharma.
"Clearly, something new is driving gold prices."
Nine of the top 10 central banks buying gold are in developing countries, including China, Russia and India, he said.
Those three countries, along with fellow BRICS nations Brazil and South Africa, are also part of an effort to create a new currency that is separate from the dollar.
"Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar," Sharma wrote. "Often in the past both the dollar and gold have been seen as havens, but now gold is seen as much safer. During the short banking crisis in March, gold kept rising while the dollar drifted down. The difference in the movement of the two has never been so large."
He attributes the rush for gold to the increasing use of financial sanctions by the US and its allies, with as much as 30% of nations facing sanctions from the US, European Union, Japan and UK.
That's up from 10% in the 1990s. But after Russia's invasion of Ukraine, the West froze the country's currency assets and kicked it out of the SWIFT system.
"Suddenly, it was clear that any nation could be a target," Sharma wrote.
In the face of the dollar's weaponization, even US allies like Thailand and the Philippines are beginning to seek alternative currencies.
Most notably, the Chinese yuan has been growing its international reach, but Sharma cites another threat — the fact that the number of central banks attempting to create digital currencies has tripled in three years.
"The risk for America is that its overconfidence grows, fed by the "no alternative" story. That narrative rests on global trust in US institutions and rule of law, but this is exactly what weaponizing the dollar has done so much to undermine," Sharma wrote. "It rests also on trust in the country's ability to pay its debts, but that is also slipping, as its reliance on foreign funding keeps growing."
Others have been less wary of de-dollarization fears, citing that the trust in the greenback is difficult to replicate.
Commonwealth's Brad McMillan said even if a strong alternative was to emerge, it would take monumental effort and persuasion to replace the dollar.
And former Treasury Secretary Larry Summers said the yuan isn't a threat to the US dollar, largely because China isn't a predictable and reliable market. |
