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Dollar Uncertainty Gains Steam with Geopolitical, Fiscal Instability

Isaac Nuriani    |
Jul 5, 2024
  • Dollar’s share of central bank reserves has fallen 20% in the last 20 years.
  • Analyst: Historical dominance of U.S. economy may not be enough to overcome dollar troubles.
  • Majority of central banks expect dollar’s share of reserves to continue falling for years.
  • New data suggests gold has been responsive to dollar weakness.
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Concern continues to grow that the U.S. dollar…perhaps the most readily identifiable symbol of economic strength both here and abroad…may be headed toward potential chronic instability. 

To clarify, I’m not talking about garden-variety fluctuations in dollar value. Those are common and to be expected.  

Under normal conditions, modest day-to-day changes in dollar strength have been standard among nations with free-floating currencies. These changes have tended to be prompted by variations in such factors as monetary policy (interest rates), the prevailing rate of inflation, and economic growth. 

I’m referring instead to something more complex: a potentially large and lasting loss of dollar value arising from nations far and wide electing to turn their back on the world’s reserve currency because of how Uncle Sam is handling his affairs. 

As for what those “affairs” are, experts speak of two, primarily, when it comes to concerns about long-term dollar impacts. 

One is the policy of the American government to use the dollar to enforce sanctions against nations with which it is geopolitically displeased. 

The other is the seemingly imprudent way the government has been managing its fiscal house. Our nation has not seen a budget surplus since 2001.[1] Recently, the national debt was rising at a pace of $1 trillion every 100 days.[2] Last year, Fitch Ratings became the second of the world’s Big Three credit rating agencies to downgrade the nation’s rating from AAA to AA+.[3] 

And as bad as all that is, the fiscal outlook of the country is projected by some to keep deteriorating – we’re going to talk more about that a little later. 

In fact, two economists, Steven Kamin and Mark Sobel, wrote recently that the manner in which Uncle Sam has been handling his affairs effectively “undermines the very properties that have led to dollar dominance.”[4] Of course it’s not a given that it will continue, but if it does, they suggest, the once-unfathomable notion of substantial dollar instability will not only no longer seem quite so farfetched, but it could prove to “be the least of our worries.”[5] 

This week, we’re going to discuss some of the signs that suggest the possibility that the dollar could be on less certain footing going forward – including some fairly eye-opening information from the central bank community about where it sees the dollar in the years ahead. 

Is dollar weakness…genuine, impactful dollar weakness…really something with which the global community, including individual investors, might have to contend at some point? 

We’ll touch on that question this week. And if the answer is, in fact, “yes,” or even “maybe,” we’ll also see what investors might do to try to hedge their portfolios against the possible fallout from a higher level of dollar instability. 

Dollar’s Share of Central Bank Reserves Has Declined for 20 Years 

Overall, the dollar’s share of global central bank reserves has fallen notably over the last two decades: from 72% in 2002 to 58% in 2022, according to Goldman Sachs.[6] 

This degree of decline in dollar reserves suggests the trend is purposeful. And while there’s plenty of debate among analysts as to how likely it is that the dollar could one day lose standing as the world’s primary reserve currency, there’s no debate about whether the movement – known as “de-dollarization” – is, in fact, in motion.[7] It is.  

Even Treasury Secretary Janet Yellen thinks so. During testimony before Congress in 2023, Yellen grudgingly admitted the dollar’s share of global reserves is in decline, saying: 

We should expect over time a gradually increased share of other assets in reserve holdings of countries — a natural desire to diversify.[8] 

So, why is it that the dollar seems to be losing its appeal? 

One reason, say experts, is the insistence of America’s leaders to use the greenback as a means to enforce sanctions against nations deemed sufficiently out of step with U.S. foreign policy interests.[9] 

Although there are numerous instances of dollar “weaponization” in modern history, perhaps the most high-profile example right now is the sanctions program applied against Russia in the wake of its February 2022 invasion of Ukraine. Following the initial offensive, Russia was subject to the freezing of roughly half of its central bank foreign exchange reserves: $300 billion. Not only are the monies frozen, but there have been ongoing discussions among the G7 (Group of Seven) nations about possibly confiscating the assets.[10] 

Needless to say, many nations witnessing the application of these measures – particularly those that don’t necessarily share the Western worldview – may conclude it’s in their best interests to lower reliance on the dollar so as to, in turn, lower vulnerability to sanctions impacts. 

But Uncle Sam’s use of the dollar to bring in line what it sees as particularly troublesome  nations is just one reason some nations may be turning away from it. Another prominent reason is America’s ever-worsening fiscal outlook…an outlook chiefly created by continued high levels of government spending far in excess of revenues, as well as the money-printing required to facilitate extra-high levels of deficit spending. 

Per the latest projections of the Congressional Budget Office, the gross national debt – now approaching $35 trillion – is on track to surpass $56 trillion by 2034. That would be an increase of more than 60% in just the next decade. As for the annual budget deficit, it’s projected to reach $1.9 trillion – and a whopping 7% of GDP – by the end of fiscal year 2024. For perspective, annual deficits over the last 50 years have averaged just 3.7%.[11]    

Dollar Uncertainty in Future, Suggests Economist, Hinges on U.S. “Getting Economic and Political Act Together” 

According to economist Barry Eichengreen, a former official at the International Monetary Fund, the dollar’s dominant posture on the global stage is at risk. But it is not, however, at risk because of a concerted effort to displace it on the part of China, Russia, or the growing anti-Western economic alliance of nations known as BRICS (acronymically named after charter members Brazil, Russia, India, China, and South Africa). In Eichenberg’s view it is America’s fiscal recklessness that potentially eventually could bring the dollar to its knees. 

“Whether the dollar retains its global role will depend not simply on US relations with Russia, China, or the BRICS,” Eichengreen said. “Rather, it will hinge on whether the U.S. brings its soaring debts under control, avoids another unproductive debt-ceiling showdown, and gets its economic and political act together more generally.”[12] 

In a recent article, Giulio Martini, director of strategic asset allocation at global investment manager Lord Abbett, also suggested America’s ever-rising indebtedness potentially could trigger dollar instability. 

“While much of the dollar’s special position stems from the unparalleled breadth and depth of U.S. financial markets and the dominant global position of the U.S. economy,” Martini said, “it cannot be taken for granted that these will be enough to overcome the strain arising from deficits that, in the absence of rising domestic saving, will require ever higher capital inflows from abroad and increasing foreign ownership of U.S. assets.”[13] 

Economists Steven Kamin and Mark Sobel, whom I referenced toward the beginning of this week’s article, also think dollar instability potentially looms at the hands of persistent fiscal recklessness. 

In a recent piece for the Financial Times, Kamin and Sobel suggested “the big threat to dollar dominance is American dysfunction.” A material component of that dysfunction, in their view, could be an unwillingness on the part of the U.S. “to tackle its unsustainable fiscal path.”[14] 

In a closely related potential development, they say, elected officials could “compromise the Fed’s independence and policies, subordinating the central bank to fiscal dominance.”[15] 

No one knows if these things will happen, of course, but the upshot, say the pair clearly, could be that “the dollar’s global role would plunge and market disorder and volatility would explode.”[16] 

There is no shortage of analysts, it seems, who think the U.S. dollar’s long-term outlook could be at risk of deteriorating as much or more on the “strength” of the nation’s increasingly precarious fiscal situation. 

And among the possible consequences of a less certain future for the dollar is that it could start to find itself losing share of all-important central bank reserves – the resources on which a central bank expects to rely if its own national currency falls into distress.  

As it turns out…that’s what central banks themselves are anticipating, adding to thoughts that the U.S. dollar could be creeping toward diminished relevance and even reliability. 

Before we conclude this week, we’re going to turn our attention to where the world’s central banks see the dollar in the years ahead. But that’s not all. We’re also going to cast an eye to data recently compiled by the World Gold Council about gold’s historical performance in the face of dollar weakness that could have welcome implications for those interested in finding ways to help hedge their portfolios against any possible dollar instability.  

World Gold Council: Historical Data Suggests Gold Has Been Responsive to Dollar Weakness  

In last week’s blog article, I detailed the results of the World Gold Council’s 2024 Central Bank Gold Reserves Survey. One takeaway from the updated set of data is that more than four in five central banks expect overall gold reserves among the institutions to increase through at least the next five years. This expectation comes even as central bank gold demand has persisted at record levels over the last two years.[17] 

But another, potentially even more significant revelation that emerged from this year’s survey results is that 62% of central banks believe the dollar’s share of global reserves will continue to decline through at least the next half-decade. That figure includes 56% of the central banks representing advanced economies…a group historically disinclined to thinking in terms of a reduction in the dollar’s stature. 

As the World Gold Council put it: 

“It is notable though that the percentage of advanced economy respondents who believe that the US dollar’s share of global reserves will fall has increased from 46% in 2023 to 56% in 2024 – reflecting increased pessimism even among advanced economy respondents about the U.S. dollar’s future share of global reserves.”[18] 

It is against this backdrop of concern about what the future may hold for the dollar in the long run that the World Gold Council saw fit to publish the results of some other analysis that many investors may find to be especially timely, given the topic at hand. 

Last month, the council published an article titled “As the Buck Stops, More Bite for Gold” detailing an analysis of “eight periods in history where the dollar experienced a prolonged contraction” and how gold performed at the same time.[19] The review goes back a little more than 50 years…to 1971, the year President Nixon removed the dollar from the gold standard.[20] 

The World Gold Council found that each of these historical periods lasted an average of 22 months – and that during these stretches, the dollar (as represented by the U.S. Dollar Index) declined 23% while gold rose 52%…again, on average.[21]   

What’s more, in its research, the council found that since 1971 when the dollar had declined by at least 10% over a six-month period, gold’s average return was 14%.[22] 

The manner in which this research and data are presented by the World Gold Council creates an compelling narrative about the potential of gold to respond favorably at times when dollar weakness is in full effect. 

That said, the council’s analysis obviously reviewed historical dollar-gold relationships, which means, by definition, we can’t know for sure if gold absolutely will respond the same way to dollar weakness in the future. 

Given this classic case of uncertainty, however, what savvy, discerning investors can do is consider taking steps on behalf of their holdings designed to hedge against the chance of dollar instability. For some, acquiring precious metals – long perceived as stores of value – either inside or outside of a tax-advantaged gold IRA may be among those steps (consult with a qualified advisor about the tax implications of IRAs).[23] 

So, yes, dollar uncertainty may be in our future. Alternatively, analyst concerns about greenback instability might not come to pass in any significant way. But if the concern does become more relevant in the years ahead, investors who chose to prepare beforehand with a prudent dollar-hedge strategy may, at that time, be grateful for both their foresight and the initiative to act on it.  



[1] Kimberly Amadeo, The Balance, “U.S. Budget Deficit by Year” (May 16, 2024, accessed 7/4/24). 
[2] Michelle Fox, CNBC.com, “The U.S. national debt is rising by $1 trillion about every 100 days” (March 4, 2024, accessed 7/4/24). 
[3] Fitch Ratings, “Fitch Downgrades the United States’ Long-Term Ratings to ‘AA+’ from ‘AAA’; Outlook Stable” (August 1, 2023, accessed 7/4/24). 
[4] Steven Kamin and Mark Sobel, Financial Times, “The big threat to dollar dominance is American dysfunction” (June 10, 2024, accessed 7/4/24). 
[5] Ibid. 
[6] Candice Tse, Goldman Sachs, “De-Dollarization: Currency Contenders” (May 9, 2023, accessed 7/4/24). 
[7] Dylan Sloan, Yahoo Finance, “Fed governor highlights de-dollarization debate as concerns grow over the greenback’s global dominance: ‘The role of the U.S. economy in world finance is changing’” (May 20, 2024, accessed 7/4/24). 
[8] Filip De Mott, Yahoo Finance, “Treasury Secretary Janet Yellen says to expect a gradual decline in the dollar’s share of global reserves, but greenback remains dominant” (June 14, 2023, accessed 7/4/24). 
[9] Current Affairs, “How the Dollar Became America’s Most Powerful Weapon” (May 12, 2024, accessed 7/4/24). 
[10] Alexander Marrow, Reuters.com, “Russia can’t match a Western asset seizure, but it can inflict pain” (May 2, 2024, accessed 7/4/24). 
[11] CBO.gov, “An Update to the Budget and Economic Outlook: 2024 to 2034” (June 2024, accessed 7/4/24). 
[12] Jennifer Sor, Business Insider, “The US needs to get its ballooning debt problems under control to keep the dollar dominant, former IMF official says” (September 11, 2023, accessed 7/4/24). 
[13] Giulio Martini, Lord Abbett, “U.S. Economy: Debt, Deficits, and the Implications for Investors” (June 28, 2024, accessed 7/4/24). 
[14] Kamin and Sobel, “The big threat to dollar dominance.” 
[15] Ibid. 
[16] Ibid. 
[17] World Gold Council, “2024 Central Bank Gold Reserves Survey” (June 18, 2024, accessed 7/4/24). 
[18] Ibid. 
[19] World Gold Council, “Gold Market Commentary: As the buck stops, more bite for gold” (June 6, 2024, accessed 7/4/24). 
[20] Randall Forsyth, Barron’s, “50 Years After Nixon Ended the Gold Standard, Dollar’s Dominance Faces Threat” (August 15, 2021, accessed 7/4/24). 
[21] World Gold Council, “Gold Market Commentary: As the buck stops.” 
[22] Ibid. 
[23] Jesse Day, Sprott, “Gold: A True Store of Value” (March 16, 2022, accessed 7/4/24). 

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