What I’m about to share with you right now is kind of contrary to most of the views that you keep hearing regarding the status of the dollar. More and more, you keep hearing that the dollar is going to lose its status.
When it comes to this point, I have to admit that I’m a little bit of a contrarian.
I actually think that it’s still way too early to bet against the dollar as a reserve currency. I put myself in the camp of Ray Dalio who thinks that a reserve currency can continue to be the leading currency despite the lack of fundamentals that would sustain the status of that reserve currency.
In fact, I’m even going a little further and I believe that in this world which is going to be increasingly digitized, I believe also that there is going to be more space for digitized fiat currencies that have proven their efficiency, and their role as a conventional Fiat currency. That might surprise you too hear that the US$ did fulfill its role as a conventional fiat currency. But if you look at it from the standpoint of allowing free flow of capital, then you have to admit that the US$, followed by the Euro, did just that. And as such, the US dollar has done it, with the euro actually following on its heels on a more regional basis.
So I know that this is a little contrary to most of the views that you keep hearing and even some of the evidence that you see in front of you. But sometimes, you have to look at a basket of pros and cons and look at the net effect left in your basket.
So, here and there, you keep hearing that this is the end of the dollar and even the end of the euro and that this is gonna be the rise of the rise of the RMB. You even hear that cryptos will replace the traditional fiat reserve currencies.
But let’s provide a little bit more texture here to a picture that is a lot more complex than it appears.
First of all, cryptos have no long term track record at all and will need the time to establish it. Their current collapse just provides further evidence that it is impossible to see them as a stable and anchored into any tangible economic reality.
Second, the fact that another fiat currency is going to continue to rise versus the USS, here I am talking about the RMB, does not mean that the US$ will collapse. You have to look at it against a basket of many other currencies. And that’s what the latest update of the SDR basket of currencies is showing. So of course, the RMB will continue to assert its position, but that does not mean that it is going to be at the expense of the US$. In fact, I am not even sure that the Chinese People’s Bank of China is really interested in taking such a unipolar role in the global monetary system. It’s a lot more complex that it appears.
Third, in this increasingly digitized world, the dollar will continue to keep its leading role. In fact in a digitized world, a Fiat currency needs to provide efficiency, flexibility and trusted operationality. The dollar remains way ahead in that regard.
However, the fourth argument, and it is also the main argument, the dollar is also underpinned by a very powerful financial system and well functioning capital markets. These are very well organized, very sophisticated, where everyone in the world can come and raise funds. Every startup executive on this planet knows that they first have to talk to New York financial executives in order to find funding. Basically the whole world can come to US capital markets and raise funds. Of course, China is also building a similar capital market infrastructure and it is modeled after the structure of the US system with the RMB as a core currency. Yet, that does not mean the emerging Chinese capital market will fully replace the US. It is much more likely to coexist next to the US market.
So that is what I wanted to share with you. I know that my view is a little bit of a contrarian view and in fact you’re seeing that the weight of the SDR the the basket and the SDR basket continues to reflect a pretty strong share in the SDR basket.
That’s what I wanted to share with you.
Let me know if you have questions and I look forward to hearing your thoughts. Feel free to comment.