The US dollar has been the de-facto world reserve currency for more than half a century, with no questions asked about the greenback’s exceptionalism. However, the Ukraine war potentially begets an inflection point wherein nations are endeavoring for a multipolar world. Countries are now increasingly finding an alternative to settle trades in other currencies.

Sanctioned nations have long been trying to reduce their dependence on the US dollar, but the unsanctioned ones are also working towards a non-dollar trade. As a case in point, oil economies are looking forward to trading their produce in Yuan. India is working on Rupee-trade settlements with a host of countries.

The global reserve currency is characterised by steady supply, liquidity, and absence of capital controls. However, the freezing of Russia’s central bank assets by the US political regime has dented the credentials of the greenback as a reserve currency. Needless to mention, the recent US sovereign downgrade by Fitch, citing steady deterioration in fiscal and debt situation over the last 2 decades. US Treasury Secretary disagrees with Fitch’s downgrade, calling it arbitrary and based on outdated data.

However, we beg to differ and think that a downgrade was long overdue given the $13 trillion rise in US debt during Presidents Biden and Trump eras and no impression of fiscal discipline coming out of Washington, characterized by the recent bipartisan agreement to suspend the debt limit until January 2025. We think that Fitch’s action is a catch-up with S&P’s downgrade in 2011 and endorses the structural issues with the US debt situation, which is projected to worsen further in the coming years.

Having said that, dollar’s reserve status is still intact given that no other fiat currency cannot compete with it in terms of liquidity. So, de-dollarisation is still at an embryonic stage, but there is a strong resolve among the non-western world to tread on this path given the increasing use of the US dollar by Washington as a weapon to sanction its adversaries (read political and economic rivals). Geopolitical experts see the US manifesting the syndrome of the Thucydides Trap, which will tilt it towards the blatant use of sanctions and other financial warfare.

After the erstwhile US President Trump’s trade war and the pandemic, the world is staring at fragmented globalisation and the formation of blocs, which necessitates the need for an alternative to the world reserve currency. This is an evolving landscape, there could be a lot of moving parts and an array of possibilities, including currency diversification, bilateral/multilateral currency swap, formation of regional payment systems, and settlement mechanisms.

Amid the varied possibilities, we reckon that gold will emerge as a certain beneficiary. Early signs of de-dollarisation are evident when seen through the prism of currency diversification. This can be manifested in a falling share of the greenback in Global FX reserves. Global central banks have been diversifying their reserves from dollars and will continue to do so by building assets in gold and other currencies. This can also be corroborated by persistent purchases of gold by the central banks, wherein they constitute 25 per cent of the global gold demand.

Central banks, particularly the ones in emerging markets have added 6,815 tons of gold to their reserves in the last 12 years. Global central banks on a cumulative basis have never sold gold between 2010 and 2022. Central bank surveys convey that appetite for gold will continue given its credentials as a store of value, a liquid global asset, and a hedge in times of crisis. This tells us that gold as an asset class is under-rated and undervalued, bearing the potential of a long way to run on the upside.

The writer is VP- Equity Strategist, YES Securities (India) Ltd. Views are personal.


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