Germany Comes Out Swinging at the U.S. Dollar
Here’s the truth: Fiat currencies don’t tend to last forever. For the U.S. dollar, this could be the case as well. The greenback could lose its dominance sooner than later.
Yes, the U.S. dollar remains the most used currency around the world. Central banks hold it, global trade is done in it, and a lot of commodities are priced in it.
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But we are seeing a lot of resistance to the U.S. dollar’s dominance. This shouldn’t be taken lightly whatsoever.
Just recently, Germany’s foreign minister, Heiko Maas, came out swinging at the U.S. dollar.
“We must increase Europe’s autonomy and sovereignty in trade, economic and financial policies,” he said. “It will not be easy, but we have already begun to do it.” (Source: “Germany urges SWIFT end to US payments dominance,” Deutsche Welle, August 27, 2018.)
“It is high time to re-evaluate our partnership … Europeans must become a mainstay of the international order, a partner for all who are committed to this order,” he added.
These remarks were made toward the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a financial messaging service for the global financial system that has argued that it is neutral, but tends to listen to the U.S.
Making Sense of It All…
This is the first time in a while where an official in power in Europe has questioned the U.S. dollar-dominated financial system and has said that it is working to build an alternative.
If Europe is able to build something like SWIFT on its own, chances are very high that it won’t use the U.S. dollar. It could use the euro. It would have more incentive to do so.
This would dampen the demand for the U.S. dollar immensely. Just imagine what would happen if a major economic hub in the global economy stops using the U.S. dollar.
Looking Beyond Europe
While Europe questions the U.S. dollar’s dominance, you can’t ignore China.
Quietly, the second-biggest economy in the world is doing all it can to make the yuan a useable and acceptable currency globally.
Yuan is being held by central banks, and their holdings are growing. Consider that in the first quarter of 2018, central banks held $144.95 billion worth of yuan in reserves. A year earlier, in the first quarter of 2017, this amount was just $95.42 billion. (Source: “Currency Composition Of Official Foreign Exchange Reserves (COFER),” International Monetary Fund, last accessed August 29, 2018.)
Simple math here: Yuan holdings grew by 52% over just a few quarters!
This isn’t all. China has built yuan trading hubs in several countries. This makes exchanging from yuan to other currencies easier.
Also, the country has started to price gold and oil in the Chinese yuan. This is big since these two commodities were primarily traded in U.S. dollars.
U.S. Dollar Outlook: Don’t Get Too Complacent
Dear reader, don’t take the developments mentioned above lightly at all. Complacency never ends well.
I have read a lot of warnings about how the U.S. dollar could collapse and so on so forth.
However, I disagree with those warnings. I believe at first, the decline of the U.S. dollar will be slow and steady. The dollar is an elephant; it won’t go down as easily as some anticipate.
But once investors, central banks, and countries start to lose trust in the U.S. dollar, that’s when we could see rigorous declines and a collapse-like scenario play out.
In the midst of all this, I am also watching gold. It looks dirt cheap. If the dollar loses its value, gold could skyrocket.
