The US dollar is at risk of losing its status as the world’s dominant currency. That’s according to one strategist at JP Morgan’s private bank who is advising wealthy clients cut their dollar holdings in half.
“We believe the dollar could lose its status as the world’s dominant currency (which could see it depreciate over the medium term).”
It’s a stark wake-up call, reminding investors that global reserve currencies do not last forever.
While the note doesn’t mention it directly, bitcoin is an obvious hedge for many of the issues cited by JP Morgan. The private bank also recommends clients increase their portfolio allocation to a “store of value,” specifically gold. Arguably, bitcoin is also becoming a recognized store of value and may deserve a place in a defensive portfolio.
We’re approaching a major turning point in economic history when the world unplugs from the dollar. This might sound crazy, but it’s not a new phenomenon. As the note explains:
“There is nothing to suggest that the dollar dominance should remain in perpetuity. In fact, the dominant international currency has changed many times throughout history going back thousands of years as the world’s economic center has shifted.”
Before the dollar, the world’s dominant currency was the British pound. Before that, the French franc and Dutch guilder – currencies that no longer even exist.
The note points to rising economic dominance in China, India, and other parts of Asia. As JP Morgan explains:
“In the coming decades we think the world economy will transition from US and USD dominance toward a system where Asia wields greater power.”
As economic dominance shifts east, there is less incentive to trade in USD. According to JP Morgan, Trump’s aggressive stance on trade is accelerating this process.
The US has already dropped its “strong dollar” policy and accoridng to many analysts, a currency war has begun. The US, China, and the eurozone are each devaluing their currency in a bid for dominance.
The process is already reflected in the numbers. Central banks are unloading USD from their reserves at record pace. See the chart below which tracks the percentage of central bank USD holdings.
And as JP Morgan points out, the dollar’s value has tracked lower for 50 years. Ari Paul believes this narrative is slowly gaining traction in the broader financial world:
“The story of USD losing reserve status is becoming an ever growing mainstream finance meme. Investors haven’t even started to reposition for this.”
So where does bitcoin come in? First, JP Morgan is urging investors to cut their dollar holdings in half. Instead, they advocate a larger allocation to “store of value” assets like gold.
Bitcoin arguably fulfills a similar store of value function, but with more utility in the digital world.
Secondly, bitcoin is a hedge against the inflationary nature of the dollar and its long-term decline. Unlike the dollar, where the supply is increased at will, bitcoin has a predictable and fixed supply.
Thirdly, in an extreme scenario, bitcoin could fill the vacuum as a reserve currency. While governments are unlikely to adopt it officially, companies and individuals may opt to transact in bitcoin to route around a possible currency war.
If nothing else, this is a wake-up call that global reserve currencies do not last forever. The dollar will be replaced as the dominant means of trade, it’s just a question of when.
Last modified: March 4, 2021 2:39 PM