It might seem deceptive to publish a headline suggesting that the US dollar, the world’s “reserve currency” for the last 78 years, might be nearing the end of its dominant role in the global economy. After all, the greenback is riding high, trading at its highest level in two decades.
Take the USD-EUR currency pair, for instance. A year ago, the mid-market rate for the world’s two most important currencies, in terms of the volume of central bank reserves held in them, was 0.83. Now it’s 0.94, more than a 13% increase.
Or the once-mighty British pound, which when it first came into being 1,200 years ago, was literally equivalent to a pound of silver. The dollar has gained more than 12% against the pound in the last year. (In case you were wondering, it would take 264 of today’s British pounds to buy one pound of real silver).
Nor is this the first time we’ve opined that the dollar could be due for a crackup. In 2020, we observed that the world was ganging up on the dollar. A year later, we wrote that there were more holes in the dollar’s reserve currency status.
Now, perhaps at the risk of appearing to be gluttons for punishment, we’re doing it again. Indeed, in a Reuters poll taken last week of 70 foreign exchange strategists, most of them predicted the dollar would retain most of its gains for at least the next six months.
And you might be surprised to learn that we agree with them.
But their prediction is nothing new. After all, as we pointed out in this article from 2021, the dollar is unlikely to collapse until the world comes up with a credible alternative.
However, the events of the last three months have accelerated the process of – dare we say it – “de-dollarization.” That hasn’t stopped the dollar from appreciating against the currencies of Uncle Sam’s major trading partners. But behind the scenes, seminal shifts are underway in how international payments are being made. So much so that Harvard University’s Economics professor, Kenneth Rogoff, who we’ve criticized for calling for the abolition of cash, recently told Bloomberg TV that we could be witnessing the beginning of the end of the dollar as the world’s reserve currency.
Rogoff went on to say that this process will likely take decades to complete. As he put it, “something that would have taken 50 years maybe is going to take 20 years.”
As we’ve also pointed out before, reserve currency status provides immense benefits to the country or countries that have it. Chief among them is the ability to run enormous government deficits.
Another benefit of reserve currency status is that it gives the government possessing it a hammer to hold over the heads of its adversaries. The hammer comes in the form of US domination of the international payments settlement system called SWIFT – the Society for Worldwide Interbank Financial Telecommunication. This organization offers over 11,000 financial institutions in more than 200 countries a network enabling them to send and receive payment orders in a secure, standardized format.
Even though SWIFT is headquartered in Belgium, Uncle Sam has a great deal of influence over it. A whisper from Washington, D.C. is all that’s needed to cut a bank – or an entire country – out of the global dollar clearing network. Thus, we weren’t terribly surprised that after Russia invaded Ukraine on February 24, SWIFT locked most Russian banks, including the Russian Central Bank, out of its settlement network.
As you might suspect, cutting Russian banks out of SWIFT didn’t go over well with the Kremlin. Neither did freezing Russia’s foreign currency reserve assets. Russian officials estimate that well over $300 billion of its assets held outside the country were affected by the freeze.
Of course, this isn’t the first time these risks have emerged. Indeed, Rogoff told Bloomberg that, “China and Russia have been looking for an alternative to the dollar for a very long time.” And both countries, along with several others, have taken important initiatives to reduce their vulnerability to what’s increasingly been called the “weaponization” of the dollar.
Since 2017, Russia and China have been settling financial obligations to one another in their respective local currencies. Since then, the dollar’s share of payments of Russian exports to China has plummeted.
Russia has also taken unilateral steps to sidestep sanctions. On March 31, a decree signed by President Vladimir Putin outlined a payment mechanism that “unfriendly” countries which had imposed sanctions against Russia would need to use to pay for energy exports; in particular, natural gas. They must now either pay for gas in Russian rubles or deposit an equivalent amount of euros or dollars in Russia’s Gazprombank, which then converts the foreign currency into rubles. Crucially, Gazprombank is exempt from the sanctions imposed against Russia. What’s more, the Kremlin has suggested that eventually, all of Russia’s commodity exports to unfriendly countries will be priced in rubles.
European countries – especially Germany – are heavily dependent on cheap Russian gas to fuel their economies. They had little choice but to agree to Putin’s terms. Reportedly, 10 European companies have already opened accounts at Gazprombank to meet Russia’s demands. If the ruble continues to appreciate, unfriendly countries will need to pay more in terms of their own currencies to buy rubles, further supporting the Russian currency.
On April 26, Russia confirmed its intention to back the ruble with gold and other commodities. Russia is one of the world’s largest gold and oil producers and over the last two decades has accumulated gold reserves of at least 2,300 tons. At $1,900 per ounce of gold, Russia’s gold reserves have a market value of nearly $140 billion. Russia’s national debt amounts to about $250 billion, so the gold which it already has in its vaults is sufficient to support a partial backing of the ruble.
The next step, should Putin decide to implement it, would be for Russia to resume buying gold at a fixed ruble price. For two weeks at the end of March and beginning of April, the Bank of Russia announced it would buy gold from Russian banks at the fixed price of 5,000 rubles per gram. That policy was put in place to support the ruble, which collapsed after the invasion of Ukraine. The initiative was successful, and the ruble (along with the Brazilian real) are the only two global currencies that have actually gained value against the dollar in the last year.
A fixed price of 5,000 rubles per gram equates to $2,206 per ounce of gold, so we suspect that Russia will opt for a lower peg if it takes this step. For instance, it might elect a fixed price of 4,000 rubles per gram, equivalent to $1,764 per ounce.
The momentum toward a Russian gold standard is hardly guaranteed. But unless sanctions against Russia end (which seems unlikely in the foreseeable future), the fixed ruble price Russia is willing to pay for gold will effectively put a floor underneath world gold prices. That would insulate gold buyers from downside risk below that price and possibly rekindle the interest of institutional buyers in the yellow metal, including central banks.
The weaponization of money makes it imperative for anyone with accumulated wealth to take defensive steps to preserve it from debasement and possible confiscation. We believe that Russia’s movement toward a gold standard will help underpin gold prices, making gold accumulation a long-term winning strategy.