Is it time to diversify away from over-weight restrictions in US Dollar trade.
The international business and financial world has long held that diversification makes good business sense. Before the word “diversification” was popularized in business schools and the economic media, the quaint folksy “don’t put all your eggs in one basket” was the simple common sense precursor.
We have diversified equity portfolios, diversified forex positions, commodities, ETF’s, multiple market funds and the list goes on. These past few years I have written about the steadily increasing discomfort a number of businesses in several countries are encountering when having to deal cross-border with the US Dollar.
While the various sanctions regimes do play a big role, the US is the absolute global record holder in initiating targeted economic sanctions. Of late, there is an obvious unipolar trend with the US sanctioning nations and/or forcing trade tariffs regardless of treaty’s, negotiated agreements or covenants. Even a somewhat hardened business type like myself appreciates that this is reaching a regularity beyond the absurd.
While normally my opinion pieces deal mostly with Russian business issues, the role the US Dollar has played in Russia has been key, for better or for worse since the 1990’s. Nonetheless, this past quarter has seen Russia selling off fully 50% of its Dollar denominated US Treasury positions. Comparatively speaking, this is only a drop in the global bucket, but it is increasingly indicative of a broader awareness, even a trend towards de-dollarization worldwide.
READ MORE: Vladimir Putin calls for Russian independence from Petrodollar
In short, there is a notion out there in the financial world that perhaps it is getting close to high time to diversify away from being over-weight in US Dollar positions, its trade linked corridors, and seek a broader multipolar balance.
Just the other day the Dollar’s share in world currency reserves as reported to the IMF fell in this first quarter of 2018 to a fresh four-year low, while euro, yuan and sterling’s shares of reserves increased. The share of USD reserves has contracted for the past five successive quarters as the Dollar further weakened in the first three months of 2018, despite these trends, the dollar remains the largest reserve currency by a wide margin.
The macroeconomic view indicates a trend beginning to veer away from the Dollar. In the eternal quest for truths defined on a quarterly basis, the microeconomic view remains volatile with short-term strengths appearing this past second quarter as anxieties over a potential global trade war and the ECB not raising their rates until end 2019, or perhaps much later. These are short term trading knee-jerks, and do not disprove the longer term trend.
The recent up and down surges in the volatile and now multiple crypto-currencies are an indication that something “other” is needed, and being looked for as alternative to the US Dollar and the basket of familiarly similar fiat currencies. It is, as we have seen in the crypto sphere, not even a subtle search for new trade mechanisms, repositories of value and safe havens. All things being equal, even gold has been relatively well supported despite the apparent strengthening of interest rates and measures of economic muscularity.
One thing is certain, given the historic magnitude of current US Debt (now over $21 trillion), and the unprecedented uncertainty in current world trade relations even the role of international law via the WTO has been railroaded. It appears that diversification away from the US Dollar and its related trade policies is a prudent area to investigate further, perhaps sooner rather than later. Remember another folksy saying – “who has the money makes the rules”, works well, until it doesn’t.