Personal Wealth Management / Expert Commentary
Ken Fisher on the US Dollar Losing its Position as Reserve Currency
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses the US dollar’s recent decline and what impact this may have for investors. Ken believes currency fluctuations seem to influence sentiment more than create any meaningful long-term effect on stocks.
Ken explains that currency valuations are not strongly correlated with stock prices. For example, U.S stocks fell into a bear market in 2022, but the dollar was very strong relative to other currencies. Conversely, stocks are up in 2023 while the value of the US Dollar has declined. Given this lack of correlation, Ken believes investors are best served putting currency concerns on the back burner in favor of their long-term investing goals.
From time to time and just recently, there's a lot of concern, often driven by some news events. This time mostly by news events coming out of the Middle East, tied to the pricing of oil, that it's going to be a terrible thing as the dollar loses its position as reserve currency. And won't that be just terrible? Now, the reality is I understand why people think that, but it's wrong.
First, what really matters is to understand what money is. And how money from different countries plays together in global trade. And said simply all money is. Nothing else. It's just what we use that we can agree on to trade for something to, if you will lubricate the trade, and make it happen effectively. That's all it is. So in reality, you've got a lot of things that you own, like maybe a Treasury bill, which isn't money that you might liquidate in a big hurry to get money to buy something.
Now, of you're in Mexico you probably buy things in your country and pesos and American dollars and in most of Europe in euros. When we go back in time, a long time back, there was only one standard global currency that pretty much most people could agree on for trade outside of their countries, which was the dollar because it was stable, relatively so. And you could trust that the US would be there and that things wouldn't change too much in a hurry with relatively stable property rights.
As time has gone on, global economy has grown and the amount of dollars traded in global trade keeps increasing with that. And if we go back to the year 2000. 23 years ago. And look at what's happened to the percentage of trade by currency around the world. The dollar has shrunk as a percentage of currency and it's that shrinkage as a percentage of currency that seems to get people agitated on this reserve currency thing. Reserve currency is basically symbolic. It's what do people actually trade in that matters. And the thing that's taken down the dollar.
As a percent is something that when I say this to you, it'll make sense, but people don't think of day to day, which is that the year before that the euro was created and when the euro was created, it was new. And there's not a lot of folks that are going to trust it to actually be stable as a brand new currency. Maybe it'll blow apart, maybe it won't work. Who knows? WA wa wa wa, wa wa. And so initially the euro didn't really have a position.
Today, about 15% of global trade is done in euros, which makes sense when you think about it, because actually euro land as a whole block is actually a bigger part of global economy than the United States is. And we went through a significant period between 2011 and 2015 when we had all that stuff that you may remember as all.
The talk about the PIIGS and potential currency and maybe the euro would blow apart and the euro came through that. So it had a long flat period where it didn't increase much, but it has increased since then and increased before then and it should. Then the other is...and let me just take another second on that because things happen in Global trade that make sense that you don't always think about. And let me just give you some examples of that.
For the Euro, there's actually now quite a few countries outside of the euro bloc that peg in euros instead of pegging in dollars. And you say, why would they do that? Shouldn't they be in dollars? And the answer is, think about it. Some Spanish countries have long banking legacies to Spanish banks from days of old. And those Spanish banks are still in those Latin American countries. So in that trade, it makes sense that they price in euros.
Likewise, quite a few African countries with former long associations with Belgium or France or some others peg in euros because those banking relationships go back there. And as the euro stabilizes, other countries peg their instead of pegging to the dollar, whereas we have lots of other countries. The headlines on this thing have been about how some Middle Eastern countries, led by the Saudis, are now accepting trades in oil with China in Chinese currency. Isn't that terrible?
They're not making it happen in dollars. But let me just make a point that people don't think about when they say that. The Saudis still peg their currency, they peg their currency to the US dollar. Why? Because they don't trust the Chinese currency to be stable longer term, and they do trust the dollar to be relatively stable longer term. But we should expect as the world progresses and we get more stable blocs like the euro, more usage of yen in Asia over time, one would hope China would stabilize and become more open and you'd see more usage of Chinese currency, particularly in Asia.
All of that is a natural progression. It doesn't mean that the dollar is used less. It means the dollar is used relatively less because the other parts of the world are developing nicely. And we should want that because it's good for everyone. Thank you for listening to me. Subscribe to the Fisher Investment YouTube Channel. If you like what you've seen, click the bell to be notified as soon as we publish new videos.
A series of disclosures appears on the screen “Investing in Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.”
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