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By Philip Saunders - Co-Head of Multi-Asset Growth
Russell Silberston - Co-Head Developed Market FX & Rates, Fixed Income
Mike Hugman - Fixed Income Portfolio Manager
Sahil Mahtani - Investment Institute Strategist*

Key findings

  • The US dollar continues to dominate world financial markets, with the euro a clear second.
  • China has accelerated efforts to reduce reliance on the dollar and boost foreign investment.
  • Geopolitical shifts, changes in energy market dynamics, structural shifts in China, and a dollar down cycle, could see de-dollarisation gather pace over the next few years, thereby eroding the exorbitant privilege of the US.
  • Scenario one anticipates full renminbi internationalisation, in which China's capital account fully opens over the next decade. 
  • Scenario two looks at renminbi regionalisation, in which rising renminbi use is concentrated in emerging Asia. 
  • Scenario three involves a reduced role for the dollar, which ultimately lowers US living standards.
  • The emergence of a genuinely multipolar world will have a profound impact on markets and portfolios.

The US dollar has enjoyed a dominant position since the end of the second world war. By some measures it is even stronger than a decade earlier. Despite America’s twin deficits, rising national debt levels, a turbulent domestic political environment and disruptive foreign policy, dollar use remains exceptionally wide and deep. Meanwhile, erstwhile rivals like the euro and renminbi have seen adoption slow.

Snapshot of the international monetary system

Sources: BIS, IMF, SWIFT, ECB, and Gita Gopinath. Data as of fourth quarter of 2017 or latest available. Empty columns imply unavailable data or negligible values.

Why there is no alternative to the dollar on the world stage:

Liquidity. The US remains the largest economy in nominal terms, meaning the supply of dollars and dollar-denominated assets is large enough to support the demands of global trade and finance.
Inertia. Many businesses in non-dollar countries invoice in dollars and are happy to deal in it regardless of the price. Effectively, they ‘think’ in dollars. Exporting firms prefer to keep prices stable relative to international competitors and also use imported inputs priced in dollars in production.1
Trust. The dollar is a viewed as a ‘safe-haven’ currency. It tends to appreciate during times of stress, which makes holding dollars attractive in normal times as well.
Lender of last resort. The US Federal Reserve is ready to assume a global role. It served as a backstop provider of dollars during the global financial crisis by pursuing swaps with fourteen central banks, including four in emerging markets.2 This contrasted sharply with the European Central Bank which in 2008 provided only limited assistance to the central banks of two EU countries, namely Poland and Hungary.3

Why de-dollarisation could be the story of the next cycle 

Geopolitical shifts 

2018 was potentially a watershed year in which countries in the path of sanctions, like Russia, Iran and to some extent China and the EU, began to accelerate ways to protect themselves from the consequences of using the dollar. President Trump’s sanctions are a proximate but not an ultimate cause for the shift. As European Commission president Jean-Claude Juncker put it, “it is absurd, ridiculous, that European companies buy European planes in dollars instead of euro.”4

Meanwhile, emerging Asian economies are always looking for ways to reduce the boom-and-bust cycle associated with the dollar, and they may get that opportunity as trade in Asia becomes less dependent on the US. Currently, for instance, a 10% US dollar appreciation takes about 1.5 percentage points off GDP growth in emerging market economies.5 Such countries therefore may find it to their advantage to sign swap agreements with the Chinese central bank and conduct trade in a currency like the renminbi, which increasingly reflects their trade patterns.

Structural shifts in China

China’s current account surplus has been on a downward trend since it touched 10% in 2007, driven by investment growth, currency appreciation, weak demand in advanced economies, and recently, a widening services deficit.6 But the big story is a shrinking of China’s working age population, which will ultimately have a negative impact on domestic savings. It is not impossible to foresee that by the mid-2020s, China could indeed be consistently running a current account deficit, implying a need to sell foreign assets or borrow from abroad. China would naturally prefer to borrow abroad in its own currency than incur foreign debt. To that end, recent Chinese initiatives to reduce reliance on the dollar include the China-led Asian Infrastructure Investment Bank, the launch of petroyuan oil futures on the Shanghai International Energy Exchange, as well as Belt and Road and the Made in China 2025 strategy.

Growth in Asia is becoming less dependent on the US
Percentage of East Asia ex-China value added by final export destination

Source: OCED, 2015

Changes in energy market dynamics

Oil is a key commodity in the de-dollarisation process. One reason for the US dollar’s historical dominance is the US-Saudi settlement in the 1970s to invoice oil in petrodollars, which underpinned a dollar-based network of trade and finance. Yet today, China has overtaken the US as the world’s largest importer of crude oil, driven in part by the rise in US domestic oil production over the last ten years. It is the resulting Chinese trade deficit from oil imports that provides the impetus for de-dollarisation, since China would prefer to settle its trade bill in renminbi if possible. Oil companies in Russia, Iran and Venezuela have already begun accepting yuan as payment for Chinese imports, and were Saudi Arabia to follow, that would have a substantial impact.




The new crude buyers on the block

Source: BP, 2017 

A dollar down cycle

Finally, there is a cyclical component to timing de-dollarisation. After spending six of the last seven calendar years on the up, another dollar down cycle may begin this year. Expensive fundamental valuations and poor technicals, which include significant foreign ownership and waning cash repatriation by US companies, will likely undermine support for the dollar. Given the historical lags between the dollar’s market price behaviour and current account and budget deficits, the dollar could fall materially in less than two years. Of course, interest rate differentials are still in favour of the dollar, and while that may change as the European Central Bank and the Bank of Japan normalise policy, there is also every chance that it is US rates that converge lower.

US twin deficits are a leading indicator of dollar weakness

Source: Source: Investec Asset Management, 2018

What will the next global currency shift look like?

The emergence of a genuinely multipolar world will have a profound impact on markets and portfolios. Although this is likely to be a gradual process, it can also happen overnight. The US abandonment of dollar-gold convertibility in 1971, or, before that, sterling’s departure from the gold standard in 1931, was initially far-fetched, then plausible, then inevitable. In both cases, the potential strategic investment implications are significant. After seven years of a dollar up cycle and a de-rating in emerging market assets, investors should be aware that the nature of the opportunity unfolding could be structural rather than purely cyclical.

Given the uncertainties of a currency transition, we explore three scenarios and their investment implications.


In conclusion

After nearly seven years of a dollar up cycle and a de-rating in emerging market assets, investors should be aware that the nature of the opportunity unfolding could be structural rather than purely cyclical. In 1985, the United States arguably crossed the Rubicon from being the currency of a leading world creditor to a major world debtor. The US net foreign debt position has only grown since then, thereby undermining the fundamental basis of the dollar’s status as the primary reserve currency.

In anticipating what now plays out, it is worth keeping in mind that the three scenarios above are not mutually exclusive. For instance, it is possible that full Chinese capital account liberalisation occurs during a period of a prolonged dollar decline. Ultimately, we think the most likely scenario is the second one, a managed internationalisation of the renminbi, and specifically a regionalisation among China’s close trading partners. That is a major geopolitical development that is likely to prompt a decline in risk premia across emerging Asia as well as a general transformation of economic cycles in the region. As such, it is likely to require a new approach to asset allocation, both globally and regionally.

*Other contributing authors
Greg Kuhnert | Peter Eerdmans | Michael Spinks | John Stopford | Iain Cunningham | Wilfred Wee | Tom Nelson | Michael Power | Imran Ahmed


1 Clement, D., “Interview with Gita Gopinath,” The Region, Federal Reserve Bank of Minneapolis, 20 December 2016.
2 Bernanke, B., “The dollar’s international role: An ‘exorbitant privilege’?” Brookings Institute, 7 January 2016.
3 Tooze, A., Odendahl, C., “Can the euro rival the dollar?” Centre for European Reform, 4 December 2018. 
4 “EU Chief aims to boost euro’s role in world markets,” Associated Press, 12 September 2018,
5 Martin, F.E., Mukhopdhyay, M., and Hombeeck, C., “The global role of the US dollar and its consequences,” Quarterly Bulletin, Bank of England, Fourth Quarter 2017, p.1.
6 “People’s Republic of China: 2018 Article IV Consultation-Press Release; Staff Report; Staff Statement and Statement by the Executive Director for the People's Republic of China,” International Monetary Fund, July 26, 2018.
7 Chinn, M., Ito, H., “The Chinn-Ito Index: A de jure measure of financial openness.” While China’s assets are greater than its liabilities, an average is used as a proxy for China’s relationship to the global economy.
8 Wildau, G., “China’s renminbi liberalisation leaves capital controls intact,” Financial Times, 22 June 2015.
9 Boz, E., Gopinath, G., and Plagborg-Moller, M., “Global trade and the dollar,” Voxeu, 11 February 2018.

Important information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, March 2019.

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