Top of Mind - May

Relative weakness in the U.S. dollar is garnering plenty of attention in the press these days. In April, Bloomberg reported the dollar had lost roughly 11% of its market share since 2016, and on May 1, The Wall Street Journal reported that after reaching a two-decade high in September 2022, the dollar had since retreated 8.3%.  

As the foundation of the international banking system since the Bretton Woods Conference in 1944, the weakening of the dollar could have wide-ranging consequences. A common refrain mulls the dollar’s status as the currency of international trade, speculating that Russia and China will band together and influence Saudi Arabia to abandon the dollar and adopt the Chinese yuan.  

In recent conversations with clients, we’ve discussed these issues, how they could impact individual investors, and how Balentine preserves capital amid market uncertainty. Let’s dig in.  

Will the yuan replace the dollar?  

As of now, much of the speculation regarding the yuan’s future dominance is, at best, premature. In April of 2022, the dollar was on one side of nearly 90% of all foreign exchange trades, according to the Bank for International Settlements. By comparison, the yuan represents nearly 1% of global transactions, and the British pound, the euro, and the Japanese yen combined represent the remaining 9%. Global trust in the dollar is still high, with more than 60% of globally disclosed official foreign reserves held in greenbacks as of 2021, according to a Fed report.  

This doesn’t mean China and other countries aren’t interested in disrupting the status quo. Since Russia invaded Ukraine in February of 2022, the U.S. and NATO countries have imposed steep sanctions on Russia and have also frozen its U.S. dollar reserves, prompting China and other countries to take notice. The message is clear – asymmetry with the West could lead to getting cut off from the global financial messaging system known as SWIFT, and it could become a permanent political tool putting pressure on countries to enforce like-minded sanctions whether they want to or not. As such, over a 12-month period, countries worldwide have begun to openly discuss the creation of alternative methods of conducting trade and settlement while reducing their dollar reserves.  

What impact would a transition away from the dollar have on individual investments?  

Make no mistake, if the dollar were to lose its grip as the currency of choice in international trade, the American standard of living would suffer. When the dollar loses value, inflation often follows because the prices of goods and services increase. As we have seen since early 2022, the Fed takes inflation seriously. It would likely continue to raise rates to counteract inflationary forces, which, in turn, could lead to higher mortgage rates and reduced demand for real estate and other traditional inflation hedges.  

At the same time, a weaker dollar makes U.S. real estate more attractive to foreign investors as their purchasing power increases, resulting in increased demand that may result in higher prices, particularly in prime locations and sought-after markets.

How does Balentine minimize risk and preserve capital amid ever-changing market activity?  

Balentine added gold to portfolios in early 2023, and we beefed up our exposure at the end of April. Historically, gold prices have an inverse relationship to the strength of the dollar, and our position has thus benefited from the dollar’s recent weakness.  

Our decision to make these moves is not based on conjecture like we’re seeing in the media – rather, it is grounded in our unemotional investment models, which analyze data to detect momentum, allowing us to take advantage of trends.  

Broadly, our models employ active investment management, which is advantageous because we can be nimble. While we can’t predict with accuracy how long the dollar will remain the world’s dominant currency, we will continue to analyze undercurrents in the markets, enabling us to move away from risk and into opportunity regardless of what comes our way.  

Thank you for taking the time to read this monthly update. My team and I are always available and happy to answer questions as they arise. Please do not hesitate to reach out.