Emerging-market currencies have the potential to gain from the gradual decrease in the use of the US dollar in global transactions. The move towards de-dollarization is a long-term trend. It may take several decades before the US dollar truly loses its crown. However, Lumen Capital Investors suggest that there is a trade to be made in the meantime.
Laurent Lequeu is the head of portfolio management at Lumen Capital in Singapore. According to him, de-dollarization is a long-term game. There are positive opportunities in emerging-market local currencies for investors looking to position themselves over the next three to five years. This is particularly true in the fixed-income asset class. The structural benefits of these currencies make them an attractive investment option.
Slow Decrease of the US Dollar’s Hegemony
There is international chatter about reducing the global use of the US dollar. This has been fueled by Chinese President Xi Jinping’s aggressive diplomatic push. There has been a slow but steady rise in the use of the yuan for transactions. Luiz Inacio Lula da Silva, the former President of Brazil, visited Chinese President Xi Jinping recently. During his visit, he emphasized the importance of closer ties with Beijing. He saw these ties as a means to challenge the institutions and norms that the US and Europe led in global finance for decades.
The US dollar’s weaponization through sanctions on Russia for the war in Ukraine has caused other governments to speak out. They have expressed the need to push back and establish alternative currency arrangements that don’t involve the dollar. In conventional economic circles, some people believe it’s still too early to predict the dollar’s collapse. This is because the emergence of non-dollar payment mechanisms has been relatively gradual.
Long-term Game of De-dollarization
Despite the possibility of the US dollar’s decline, it is still the dominant currency in world trade and is unlikely to change in the short term. However, with the US debt burden rising and the country’s political instability increasing, there is a need for a more robust and sustainable global financial system. The move towards de-dollarization is a step in that direction.
The current global financial system is heavily reliant on the US dollar. Approximately 88% of all foreign exchange trades involve the US dollar. This reliance on the US dollar has significantly burdened emerging-market economies. These economies are vulnerable to fluctuations in the value of the US dollar. Additionally, the US dollar’s dominant position has given the US the power to impose its policies and sanctions on other countries. This has led to resentment and a desire for alternative financial arrangements among these countries.
The gradual move towards de-dollarization involves diversifying currencies used in international transactions and reducing the reliance on the US dollar. Several countries have taken steps towards this. For example, Russia and China have agreed to trade in their local currencies. Iran and Venezuela have also explored bypassing US sanctions by trading in their local currencies or cryptocurrencies.
Opportunities for Emerging-Market CurrenciesThe gradual decrease in the use of the US dollar presents opportunities for emerging-market currencies, especially in the fixed-income asset class. These currencies have been undervalued due to the dominance of the US dollar. However, the move towards de-dollarization could lead to a revaluation of these currencies.
Additionally, emerging-market countries could benefit from reduced borrowing costs as they would no longer have to pay the premium associated with borrowing in US dollars. This could lead to an increase in foreign investment, which would further boost their economies.
The shift towards de-dollarization is not without challenges. The US dollar’s dominance is deeply entrenched in the global financial system. Any attempts to reduce its use will face significant resistance. Additionally, alternative currencies like the euro, the Chinese yuan, and cryptocurrencies like Bitcoin have not yet gained enough traction to replace the US dollar as the dominant currency.
Despite these challenges, the gradual decrease in the use of the US dollar presents an opportunity for emerging-market currencies. The need for a more diverse and robust global financial system will only increase as the world becomes more multipolar. The move towards de-dollarization is a step towards this goal. It presents an opportunity for emerging-market economies to diversify their currencies and reduce their dependence on the US dollar.