Interesting article on the US$ reserve status

Nice little UBS research note published on Barron’s website discussing the dollar’s resemblance to the sliding sterling in the early 20th century.

I have to agree with this article for the most part. I haven’t discussed this aspect much lately but despite my bearishness regarding the US dollar, I do not expect the armageddon type event that dollar bears like Peter Schiff or Jim Rogers expect. There is no doubt that a US currency decline is structurally baked in the cake due to the unsustainable twin deficits and as a result, the greenback will continue to lose value in the intermediate to long-term.

But that doesn’t mean there aren’t opportunities to make money in US assets. Also, the sterling’s demise as the global reserve currency was marked by a World War (II, to be specific), which viscerally demonstrated England’s (and Europe’s) decline — this suggests when events of that magnitude occur, the global dislocation is jarring and massive, to say the least.

I would guess we will have to wait at least until the next decade before this risk becomes prominent and I’m sure the signs would be evident in increased geo-political tension and war. Trying to game this seems a bit ill-advised — the truth is no one can predict the fall-out from such macro shifts and it’s unclear which powers will rise to replace the US as the pre-eminent power in the world.

Moral of the story: diversify away from the dollar but don’t go nutty over it. At least not yet.

2 Responses to “Interesting article on the US$ reserve status”

  1. Cash212 Says:

    For the last 30+ years the world has been overly dependent on the US$ as a reserve currency causing the $ to be overvalued relative to world currencies. I believe this is a natural and welcome correction that is healthy for the world economy and the decline will continue, especially relative to Asian/Emerging Mkt currencies backed by strong economies with manageable budgets running CA surplus. The decline should be manageable as the US capital markets are still the most liquid in the world and, barring a complete economic/financial collapse, will remain an attractive destination for large FX reserves. I do not believe, however, that the US$ is poised for a decline versus the Euro or GBP as I don’t see what makes these economies any more attractive than the US economy and I believe the interest rate differential will decline in the near future.

  2. Davy Bui Says:

    As always, identifying the larger trend and profiting from it are 2 different matters. It’s fairly clear that the US$ must decline. The key question I find myself asking is, what will that mean for the average American (i.e. those without offshore accounts) and our way of life? When this converges into other disturbing trends such as energy scarcity, and now agricultural scarcity, what will be the fall-out?

    I agree with you that a knee-jerk move into the euro or pound may not be the wisest option. I generally don’t trade in currencies but did try (unsucessfully) to convince my fiancee to move our rainy-day savings fund into Canadian $ or a high-yielder early last year.

    Precious metals and commoditties seem a safe bet here. I’ve also considered the yen but more as a hedge to equity market exposure than a play on currencies.

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