It Started: China Is Dumping The US Dollar

The current global financial landscape is undergoing a significant shift, the largest in decades, with major implications for how individuals invest their money. The US dollar is experiencing its worst performance in over 50 years, oil prices are rising, increasing the risk of stagflation, and for the first time in modern history, the United States is losing its global trade dominance to China. These are not isolated incidents but indicators of a fundamental change in the global balance of power, trade, and finance, as warned by major financial institutions like JP Morgan. Historically, shifts in the global financial order have presented significant investment opportunities and wealth destruction events. The current transition, marked by the changing world order, is no exception. Following World War II, the US emerged as the dominant global economic power, and the US dollar became the world's reserve currency. This "exorbitant privilege" allowed the US to run deficits and borrow cheaply because other countries needed dollars for international transactions, oil purchases, and trade, leading to significant investment in the US. However, this dynamic is changing. By purchasing power parity, BRICS nations (Brazil, South Africa, Russia, China, UAE, etc.) now represent about 45% of global GDP, while Western nations, including the US, account for only 30%. This coalition now controls more of the global economy than the Western alliance that established the current world order. A key indicator of this shift is the declining role of the US dollar in global foreign exchange reserves. In 2016, the dollar constituted about 65% of these reserves, but by 2024, it had fallen to 59%, and by 2025, it was down to approximately 57%. This nearly 8% decline in a decade is accelerating due to a deliberate "de-dollarization" strategy. Previously, countries held dollars as a safe store of value. However, the US freezing Russia's foreign reserves after the Ukraine invasion prompted many non-allied nations to diversify their holdings to mitigate similar risks. This diversification includes a move towards gold and other currencies, and crucially, the development of new payment systems designed to bypass the dollar. China, for instance, significantly reduced its holdings of US Treasuries, cutting them in half from 40% in 2010 to around 20% by 2025. They have also launched the China Cross-Border Interbank Payment System (CIPS), which facilitates transactions in digital yuan, gradually eroding the dollar's market share. Beyond China, other countries are implementing dollar-bypassing strategies. These include: 1. **Bilateral Trade Settlements:** Countries settling invoices directly in their own currencies, reducing the need for dollars, particularly seen between China, India, and Russia. 2. **Massive Gold Purchases:** Central banks are stockpiling gold as a neutral, non-dollar asset, hedging against currency risks and sanctions. 3. **BRICS Pay:** A platform enabling direct transactions between BRICS nations in their own currencies, bypassing the dollar and SWIFT networks. 4. **mBridge:** A blockchain-based framework being tested by central banks in China, Hong Kong, Thailand, UAE, and Saudi Arabia, allowing for digital payment settlements without third-party confirmation. 5. **The Unit:** A proposed digital settlement currency backed by gold and a basket of BRICS currencies, designed to avoid dollar-based transactions. While these initiatives may not fully replace the dollar overnight, they provide incentives for countries to use it less, thereby weakening its dominance. Looking ahead, major financial institutions project significant changes. Goldman Sachs believes China could overtake the US as the world's largest economy by 2035. However, the growth of emerging markets, particularly India, is a more profound story. India's rapidly growing, young, and tech-literate population is projected to become the world's third $10 trillion economy by 2036, eventually rivaling the US and China. By 2050, emerging markets are expected to comprise nearly half of the global stock market, with India alone potentially tripling its share. For the average American investor, who typically holds about 80% of their assets in US markets, this presents a challenge. Historically, this concentration made sense when the US was the fastest-growing economy. However, updated 10-year return forecasts from institutions like Vanguard, JP Morgan, and Fidelity suggest that international and emerging markets are poised for better performance. Vanguard projects US stocks to return 3.9% to 5.9% annually, while international markets are expected to yield 4.9% to 6.9%. JP Morgan is even more optimistic about emerging markets, projecting around 7% annualized growth, with Fidelity estimating over 8% annually over the next 20 years. This shift is attributed to emerging markets having more room for growth and starting from a lower economic baseline. Additionally, US market valuations are considered stretched, with the top 10 companies accounting for about 40% of the S&P 500, creating concentration risk. A weakening dollar further enhances returns for US investors in foreign stocks. The rising national debt and money printing are expected to devalue the US dollar over time. Despite these challenges, the US dollar is not expected to collapse in the short term due to the lack of a viable immediate alternative. Europe faces debt crises, China has capital controls, gold is impractical for real-time settlements, and Bitcoin is too volatile. The US dollar still benefits from its vast, liquid, and globally trusted market, coupled with a strong military. It remains dominant in foreign exchange transactions and global payments. Furthermore, the US leads in critical sectors like AI, semiconductors, and biotech. Thus, the current situation is more accurately described as dollar dilution, where the US transitions from being the sole superpower to one among several. This process is expected to take decades. To navigate this changing landscape, several investment strategies are recommended: 1. **Diversify Globally:** Avoid concentrating all investments in the US. 2. **Invest in Emerging Markets:** Given their growth potential and favorable valuations, international and emerging market index funds are attractive. 3. **Consider Precious Metals:** Central banks' significant gold purchases suggest its value as a hedge against currency risks and debt cycle dynamics. 4. **Own Commodities:** As emerging markets grow and the dollar weakens, commodities like oil, metals, and food are expected to rise in price, offering insulation against supply shocks and inflation. 5. **Maintain US Exposure:** While not advisable to be all-in, the US still offers stable returns (4-6% projected by Vanguard), innovative sectors, and deep capital markets. The current environment is not a cause for panic but a signal that past return expectations may not hold. Strategic, small adjustments in investment allocation today can have significant long-term impacts. The key is to remain flexible, pay attention to global shifts, and invest in markets poised for growth. By positioning portfolios accordingly, investors can benefit from the world's expansion, whether the US continues to dominate or not, potentially unlocking significant opportunities over the next decade.