Understanding the U.S. Dollar and Recent Fitch Ratings
We have received questions recently regarding the U.S. Dollar and countries like Brazil, Russia, India, China and South Africa (BRICS) potentially developing alternative currencies and financial institutions. While we agree that the U.S. fiscal and monetary situation has deteriorated over recent years, and it is likely that China and Russia in particular are pushing to find alternatives to the U.S. Dollar and financial institutions, we do not view this as an imminent threat to the global economy or your investment portfolio.
The U.S. Dollar dominates global trade flows and we do not expect this to change in the near term. It’s estimated that the total value of global trade in 2022 was $32 trillion. The U.S. Dollar was 88% of those trades1. That is only down from 90% in 19881. Further, a reserve currency like the U.S. Dollar must be deep enough to support such large demand, be overseen by a country that can support large current account deficits, has a clear rule of law, does not impose capital controls, and supports property rights. To us, none of the BRICs demonstrate this resiliency. As such, we believe the U.S. Dollar remains the world’s reserve currency for the foreseeable future.
We think maintaining a diversified portfolio of U.S. and International stocks and bonds is the best defense against any potential actions by these countries, which is how we have invested your portfolios. Clearly many countries throughout history have held the world’s reserve currency and lost it, but for now we think this issue is more in the “noise” category than anything. We suggest focusing more on strong financial plans and the resiliency of the U.S. economy and corporate earnings.
Additional Reading and Resources:
1-Marc Chandler, The Dollar Rules the Financial Universe. China Can’t Change That, Barron’s, March 31, 2023.
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