Is This the Beginning of a Massive Dollar Run?

Thu, Mar 7, 2019 - 3:48pm

Some 88% of all currency transactions globally involve the buck. The euro is a distant second at 31%, the Japanese yen is third at 22% and the Chinese yuan is involved in only 4%, not much more than the Mexican peso’s 2.2% despite the Chinese economy being 11 times that of Mexico. About two-thirds of the foreign-currency reserves of foreign countries are held in U.S. dollars. China has $3.1 trillion and Japan, $1.3 trillion.

Long-Run Dollar Strength

In the long run, the dollar should continue to benefit from being the world’s first and foremost international currency. As we first discussed in the 2013 book, Currencies After The Crash, our research going back to ancient times revealed six characteristics of a leading currency, all of which the dollar fulfills and will no doubt continue to do so. Our October 2018 Insight updated this analysis, which appears increasingly valid.

1. The U.S. has the highest GDP per capita with $59,532 in 2017 compared to $36,869 in the eurozone and only $8,827 in China (see below). Also, the American economy has grown faster than other major economies in Europe and Japan since the Great Recession.

2. The American economy is the largest by far with $19,291 billion GDP in 2017 compared to $12,589 billion in the eurozone and $12,238 billion in China.

3. The depth and breadth of U.S. financial markets is unexcelled, making them and the dollar attractive to foreigners. America’s stock market capitalization in 2017 was $32.12 trillion, far outdistancing the eurozone’s $11.03 trillion and China’s $8.72 trillion (see below). And American sovereign debt, heavily used by foreigners as a store of assets, was $15.3 trillion in 2017, double heavily indebted Japan’s $7.6 trillion.

4. America has largely free and open economy and markets, making it an attractive place to invest, especially compared to China with tight controls and unpredictable policies. The World Bank ranks the U.S. eighth out of 189 countries for business-friendly regulations. The U.K. is ninth, Germany 24th, Japan 39th and China a distant 46th.

5. There’s no substitute of any size for the greenback on the global stage. The euro is curtailed by continuing economic and financial turmoil in the eurozone, and insular Japan doesn’t want the yen to be a global currency. China lusts for worldwide status for her yuan, but her tight control of that currency repels foreigners.

6. The U.S. dollar enjoys unprecedented credibility with virtually no perceived risk of confiscation or devaluation. Also, Trump’s vigorous assertion of economic, financial and military strength, especially in his showdown with China, raises the greenback’s credibility and appeal...

To read the rest of Gary Shilling's March INSIGHT newsletter, click here for subscription information. Each issue includes an extensive overview of the economy, exhaustive investigations of key economic indicators and how they affect your investment portfolio, detailed examinations of emerging business and financial trends that could spell opportunity or danger to you and your investments, our investment themes, a wrap-up of recent economic data, and Gary Shilling’s back-page Commentary on matters great and small. You can also follow Gary on Twitter @agaryshilling.

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