The dollar has slipped by 8.9 percent against the euro since inauguration day and 4.65 percent after President Trump announced sweeping tariffs on April 2, leading many to question its once irrefutable status as the defacto global currency.
These capitulations are alarming, for several reasons, but do not yet signal the imminent end of the dollar as the reserve status, according to most global economists or commentators.
But that does not stop those most reliant on the U.S. dollar as a reserve currency, investors, from being concerned that this reality may not be too far off the horizon. Eric Veiel, head of global investments and chief investment officer at T. Rowe Price, told II that he is watching the dollar very closely as cracks start to form.
“From a markets perspective, the thing that the United States has most benefited from has been dollar reserve currency status, and if that unwinds in a meaningful way it is really difficult for U.S. markets in particular, but markets broadly because it’s going to impact U.S. consumers who are the engine of this economy,” he said maintaining that this is not in any way a prediction, but that indicators suggest it could be a distinct possibility at some point in the future.
“That is what I am watching closely, not just the tenure, not just the banks, not just the equity market: But how these plus the strength of the dollar all correlate.”
In a worst-case scenario, the U.S. dollar will lose its strength globally against any number of potential usurpers, including the euro, yen, gold, or even bitcoin, which has shown resilience amid the current market turmoil. Asset owners will react to a weakening dollar by acquiring other assets or currencies and then the U.S. will be faced with a twin deficit, trade and budget, and serious economic implications, much like other countries face regularly.
The U.S. has long enjoyed the benefits of being the reserve global currency: lower borrowing costs, lower exchange rate risk, greater consumer power, and less inflation risk. Being the reserve currency does raise other issues, with artificially low interest rates leading to loose spending and significant government debt. The U.S. currently holds $36.75 trillion in national debt, the highest globally and in excess of the entire U.S. economy with a debt-to-GDP ratio of around 122.7 percent.
Since the cracks started to form China – which is among the largest international holders of U.S. debt – has suggested intentions to decrease its holding of U.S. Treasury bonds.
Although that suggestion is a direct retaliation to U.S. tariffs, this implies a shift away from China’s reliance on the dollar and could have a negative impact on demand and interest rates, further hurting the U.S. economy.
For Veiel this is the worst-case scenario for the firm and for the U.S. economy, but that does not mean T. Rowe is taking significant steps to prepare. “I am not predicting that it is going to happen at all, but I am watching closely,” he said.
This is because the firm does not deploy a top-down view, instead trusting portfolio managers to stay focused on the right time horizon for the strategy that they are managing and avoid being caught up in trying to outguess what the next headline is going to be for the $1.6 trillion it manages across asset classes. Each PM manages their own level of risk for mandates.
Although this is one of the most challenging markets to navigate on a short-term basis that Veiel has witnessed during his two decades with the firm, he favors being clinical to understand the macro and what is being priced in, as the odds of successful prediction are slim.
Yet T. Rowe has stuck with active strategies and has largely been successful, with Morningstar data suggesting that the manager tends to outperform the market. “I don’t think that any human being has the ability to perfectly predict what’s going to happen tomorrow or the next day, that’s not what we try to try to do, per se,” he added. “What we try to do is really understand companies, understand credits, and then understand what the market is pricing into that security and find that arbitrage over the time horizon that we think we can exploit it in.”
So while the dollar decoupling from the global economy is not yet something to really worry about, if it did lose that status then all bets are off for the U.S. economy.
