~ By Michael Lombardi, MBA
Since July of this year, the U.S. dollar is up about 10% against a basket of other industrialized world currencies. Some say the dollar is up because the Federal Reserve has stopped printing paper money (while other countries are still printing) and because the Fed has said it will raise interest rates in 2015 (while other countries are still lowering their rates).
To me, the dollar has gained against other world countries for the simple reason that other countries are faring much worse economically than the U.S.
But regardless of the reason for the strength of the U.S. dollar, behind the scenes, countries continue to distance themselves from the dollar.
More specifically, developing countries are ending their reliance on the U.S. dollar and preferring to trade in their local currencies.
During an interview with Russian Radio, the Indian ambassador to Russia was asked about Russia and India doing trade in local currencies. His response:
"It is obviously advantageous, because trade between Russia and India is now through the currency of a third country (the U.S. dollar) which means business people have to hedge against two different currencies – between rupee and dollar and then dollar to ruble and vice versa. So if you cut out one currency, transaction costs are lower and trade becomes more competitive. We have already a joint working group... which is considering putting this in motion. We hope that it will soon recommend to the two Governments on how to go about it. This we believe will be a major boost to trade." (Source: "India, Russia will be benefitted from trading in national currencies – Indian ambassador to Moscow," Russian Radio, September 22, 2014.)
Turkey and Russia, are also working together to increase trade among each other in local currencies. The Russian-Turkish Intergovernmental Commission said, "The working group on financial and banking cooperation...is to continue its work to eliminate them and increase the volume of payments in the national currencies of Turkey and Russia." (Source: "Russia, Turkey Agree to Boost Payments in National Currencies,"Sputnik News, November 26, 2014.)
The three countries mentioned—Russia, Turkey, and India—play a critical role in global trade and are part of the G20 countries. China and Canada are working on trade deals in non-U.S. dollars; so are other countries.
While countries are working to trade in local currencies, when looking at the U.S. dollar as a percentage of total global central banks' foreign currency reserves, it is also declining.
In 1998, central banks around the world had $1.64 trillion in total foreign exchange holdings—54% of this amount was in U.S. dollars. Fast-forwarding to 2013, the U.S. dollar only made up 32% of all foreign exchange holdings at the central banks. (Source: International Monetary Fund COFER, last accessed December 2, 2014.) It couldn't be any clearer: foreign central banks are reducing their exposure to the U.S. dollar.
To protect wealth from the deteriorating dollar, I'll say it again: investors should be looking at gold (especially at today's depressed prices), because gold is the only currency that has provided wealth preservation longer than any form of fiat currency.