Weekly Buzz: The dollar may dip but it still dominates 👑

5 minute read

The US dollar remains the undisputed global gold standard of currencies – it's the world's primary choice for investing, trading, and reserve holdings. But with the turmoil caused by President Trump’s tariffs, markets are wondering whether its global grip is loosening, or simply hitting a speed bump.

What’s going on here?

“De-dollarisation” and “changing world order” are terms being thrown around, speculating about the end of the almighty dollar’s reign. Some central banks are adjusting their reserve portfolios, governments are experimenting with non-dollar bonds, and alternative payment systems could emerge.

However, the dollar still accounts for about 60% of global foreign exchange reserves – the next closest competitor (the euro) only stands at around 20%, according to IMF data. 

The recent tariff tensions have, however, raised some eyebrows. The White House has hit its trading partners with unpredictable new import duties and that shift toward economic nationalism has made their allies uneasy. Global markets like stability – and that’s being tested right now. Since the start of the year, the US dollar has lost about 10% of its value against a wide basket of currencies.

But this isn’t all about one US president. When Russia invaded Ukraine in 2022, a string of sanctions sent a clear reminder – the dollar can be a powerful weapon. That was a wake-up call for countries like China and India, prompting them to explore ways of reducing the risk of being cut out of the dollar-based system. 

What’s the takeaway?

It's important to maintain perspective. The greenback still holds a central place in global finance and US markets continue to offer unmatched depth and liquidity. However, if your entire portfolio is invested solely in USD-oriented assets, you might be overconcentrating your risk. It’s always a good idea to aim for a portfolio that spreads your exposures to capture opportunities worldwide.

Take our General Investing portfolios, for instance. Their underlying ETFs invest in multiple countries, asset classes, and currencies – strategic allocation which helps buffer against swings in any single currency. Even within US equity allocations, many underlying companies generate a significant share of revenues from overseas, adding another layer of global exposure.

Currency exposure vs. denomination

Plus, currency exposure can be more nuanced than it first appears. It’s important to differentiate between the currency denomination of an ETF and the currency exposure of the assets it holds. For example, a Japanese equity ETF may be traded and quoted in USD, but invests in Japanese companies whose fortunes are closely tied to the yen and local economics.

The bottom line? Currency movements are notoriously difficult to predict, and attempting to time them is generally a losing game. So while the US dollar may be experiencing some turbulence now, it’s unlikely to be dethroned anytime soon – global diversification remains the most prudent long-term strategy.

📰 In Other News: China's growth surprise – the calm before the tariff storm?

China’s GDP grew by a better-than-expected 5.4% year-on-year for the first quarter, but analysts don’t expect that economic resilience to last. With the US placing 145% tariffs on Chinese imports, it's easy to see why they're pessimistic.

Eager to ship stuff to customers before those increased costs set in, the country’s factories have likely been pushing production lines into overdrive, contributing to that healthy growth number. That figure was also fueled by the retail side of things – helped along by state-sponsored spending incentives, Chinese shoppers spent 5.9% more this March than the last, far above the 4.2% analysts predicted.

These articles were written in collaboration with Finimize.