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At the G10 Rome meetings in 1971, John Connally, President Nixon’s Treasury Secretary in 1971-72, shocked the world when he bluntly told a room of European finance ministers that “the dollar is our currency, but it is your problem.” That was more than 50 years ago. Today, geopolitics are changing the game: Capital is no longer flowing to the U.S. the way it once was.
Consider what has unfolded over the last few years. The Ukraine war buoyed energy prices, meaning commodity exporters were swimming in money. During previous booms, the proceeds were always recycled into America’s capital markets. That is not occurring this time. Why? Primarily because the U.S. has increasingly turned to financial sanctions as a weapon. Instead, money is heading back into domestic currencies and even into gold (with foreign central banks buying more tons now than at any time since the data began in 1950).
Currency markets, like all markets, are arenas of action and reaction. Weaponizing your currency with sanctions and using dollars as an alternative to military force when policing international order – rightly or wrongly – has consequence. In fact, sanctions have now turned against U.S. dollar strength, becoming weapons of the currency’s own mass depreciation.
Looking ahead, the dollar-centric financial system that has been in place since the 1950s is now clearly moving toward a more multi-polar currency system. A mere glance of the facts shows evidence of the shift: the de-dollarization of assets; new bank-to-bank payment mechanisms; and, of course, settlement of bilateral trade in national currencies other than the USD. Countries that formerly grumbled about America’s financial might, and did nothing, are finally pushing back. The new refrain from foreigners may be re-phrased as “your currency, your problem.”
It was natural that America and its currency held the world rapt when that world was unipolar. The 2008 global financial crisis, which originated in the United States, paradoxically strengthened its status as a safe haven. When global trade, saving, borrowing and reserves are largely in one currency, these strengths are mutually reinforcing. What’s more, lingering risk aversion from 2008’s crisis and the perception that economies were fragile, caused capital to stay close to shore. That meant America, with its senior economy and deep and liquid capital markets, was the prime beneficiary (name your applicable metaphor: cleanest shirt in the dirty pile, safest house in a bad neighbourhood, etc.). The technology sector was also the crown jewel of global asset markets during the 2010s and Silicon Valley was its epicenter. Then, throw in some favours from providence – the shale gas revolution, Europe’s austerity drive, China’s long lockdown – and capital practically ran into the U.S. dollar’s embrace. Everyone swiped right on America for years.
But the world is moving on from U.S. dollar dominance. What is now clear is that we are living through, if not the end of the U.S. dollar as the world’s reserve currency (a topic with duration measured in decades), then a brutal exposure of its cyclical limits. Much must go right for it to strengthen from here: The U.S. dollar index is now overvalued at comparable levels with past secular peaks in 1985 and 2002.
This is happening at a time when doubt is growing whether the U.S. really is the world’s safest house. It was America, not emerging markets and certainly not the Eurozone, where animal spirits were unleashed most ferally and where excess and leverage were the most extreme. Forget the U.S. government’s record pandemic stimulus and soaring budget deficits. Most of the scandals and business failures are now appearing in the U.S. First it was trouble in crypto-land with the collapse of FTX. Then it was regional bank failures. Next will be trouble in private markets, especially in venture capital and growth equity.
Ultimately, currencies are driven by stories. Good stories attract capital and drive up the national currency. As global growth broadens out, the long-ignored international markets will start to get bid. As capital moves in, a self-reinforcing cycle will unfold as stronger currencies attract more capital and further drive up local markets. This is already happening.
At the time of writing, the trade-weighted U.S. dollar is down more than 3% from its peak in late-September. Canadian investors should generally hedge U.S. dollar asset exposures, remain unhedged versus select international currencies and overweight select commodities (which are priced in U.S. dollars and benefit from currency weakness). Strong currencies are some of the best tailwinds to total returns.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Super Trends 2024. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.
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Content © 2024 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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