The euro is in second place and makes up about 10% of foreign exchange reserves. The Chinese renminbi (often touted as the next great currency) is only 2.5% of foreign exchange reserves. Yes, China has pushed to increasingly use the renminbi in bilateral trade, but strict capital controls on flows of renminbi out of China severely limit its potential as a global currency.

Economists have pointed to the overuse of dollar sanctions overseas and US financial instability as potential factors in the loss of dollar dominance. Loss of reserve status would have severe repercussions. For example, we would lose the ability to finance our ever-growing deficits and also lose substantial influence in global affairs – in other words, the US would be much poorer and much less influential.

China’s Belt and Road Initiative is a good counterexample to US dollar hegemony. As part of the Belt (the old Silk Road trading route between the Roman Empire and China that goes through Europe, the Middle East, Russia, and Central Asia) and Road (the maritime route that goes from China around India, up the coast of Africa, through the Red Sea and Suez Canal, and into the Mediterranean) initiative, China is supplying cheap financing, infrastructure development, energy security, and technological know-how to the region while pledging to recognize “absolute sovereignty” of those countries. This is a pledge from China not to meddle in local political affairs, comment on human rights abuses, etc. Continued global dollar dominance is the main constraint on the expansion of Chinese economic and military influence in the region.

Investment Implications

Due to a lack of better options on the world stage, future loss of US dollar dominance is probably better visualized as a slowly deflating balloon rather than an exploding one: a mild headwind for dollar assets and a mild tailwind for non-dollar assets over the longer term.

The best asset to hedge a weakening dollar is one that is priced in a currency other than the dollar. International bonds and stocks, for example, have historically been better hedges of dollar weakness than US stocks, US bonds, gold, or Bitcoin. Approximately 34% of our equity portfolio exposure – the specific percentage will vary on a client-by-client basis – is denominated in currencies other than the dollar, and potential dollar weakness is one reason for investors that prefer US equities to stick with some international exposure in their portfolios.