Investors, and Canada, should take note as the greenback’s dominance in international finance could weaken
The possibility of the U.S. dollar losing its role as the world’s reserve currency is deservedly getting a lot of attention of late. Investors should take heed.
Trust in the U.S. and its currency has not been lost but it has been severely degraded over time as the country’s debt levels have skyrocketed and its interest rates sank through quantitative easing policies. History teaches us that even great empires have a credit limit regardless of their ability to print their own currency. We can look to the British Empire, Mongols, Ming Dynasty, the Romans and countless other victims of the hubris of currency debasement.
The other metric demonstrating the longer-term decline of the dollar is the fact that for years now, U.S. Treasuries have traded at higher yields and lower prices than the bonds of developed countries such as Germany, independent of their relativeand fiscal realities. Typically, the debt of reserve currency countries enjoy high demand relative to their economic outlook and can issue debt at lower levels, all things being equal. This is no longer true for the U.S.
Markets, especially currency markets, never go in a straight line forever. There will eventually be a counterrally. However, investors need to appreciate that we are in a period of change. The U.S. is losing political and economic respect among its friends and allies. And the first lesson taught in international business in university is that investors demand compensation for political risk.
Do not assume that if the U.S. dollar runs into chronic problems that the loonie will magically rally to par. When the U.S. catches a cold, Canada catches pneumonia. We are dependent on the U.S. economy and will continue to be despite what politicians and pundits will tell us.Investors should look offshore to diversify their investment opportunities. Equities in other countries can sometimes offer more attractive opportunities than in North America, relative to risks.
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