Stock Market Insights: Losing the dollar as the world’s currency

“We can always take it back.”

I don’t know when my Craftsman tool indoctrination began, but one thing for sure, we knew if we broke it, bent it or wore it out, we could take it back and get a new replacement wrench. We trusted in the strength of the Craftsman warranty just like the world trusts in the strength of the U.S. government and uses the dollar.

There has been a lot of talk lately on social media and radio about the U.S. dollar losing its standing as the world’s reserve currency. The technical term is “De-dollarization,” which refers to countries moving away from using the U.S. dollar as the primary currency in their global trade and investments.

It’s true that China is starting to use the yuan in commodity trades with a few trading partners, such as Russia, Brazil and Argentina and wants the Chinese yuan to be a prominent currency. A lot of talking heads say this will weaken the demand for the dollar. I think this whole idea is overblown. Wanting it and doing it are two different things.

While the dollar has dropped some in value in the past six months, it’s still the leading currency in the global economy. Almost 90% of all global transactions are in the U.S. dollar. As a comparison, the Chinese yuan is used in less than 2% of all global trades, according to the Federal Reserve Bank of New York.

The dollar is also still the preferred currency reserve for other countries. The dollar’s percentage of global reserves has declined some in the past two decades as other central banks have diversified, but the U.S. dollar is still the No. 1 preference, and there isn’t a close second. Nearly 60% of global reserves are in the U.S. dollar. By comparison, the euro is second at 20%, and the Chinese yuan is only 2% of global reserves, according to the International Monetary Fund.

The reason is that the world’s reserve currency must be easily exchangeable and considered safe. Only the U.S. meets that criteria. That’s why an enormous amount of foreign money flowed into U.S. treasuries and U.S. stocks during the pandemic.

The world will continue to shift away from U.S. dollars as other countries and investors continue to diversify, but the dollar isn’t going to lose its place as the world’s reserve currency anytime soon. The U.S. dollar is simply still the best currency to do business with.

The global economy might operate with a less-dominant dollar in the future, but that will be my great-grandchildren’s problem, maybe even their great-grandchildren.

Once, our family picked up a tool bag from the side of the road. There was a mangled 9/16 wrench that was obviously used for something not intended by Craftsman. I took it to Sears, and they replaced it with no questions asked.

A store in town sells cheap Chinese-made tools, but I keep buying Craftsman. I stick with the tool backed by one of the strongest warranties on the market.

Other countries, even our enemies, stick with the U.S. dollar because the strongest economy in the world backs it.

Have a blessed week.

Fervent Wealth Management is a financial management and services entity in Springfield, Mo. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

Opinions are for general information only and not intended as specific advice or recommendations. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and can’t be invested in directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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