Which currency is facing a major sell-off? That’s right, the US Dollar — at least if you listen to the perennial bears in the investment world. There are many arguments in favor of this: sooner or later, the United States’ debt will lead to the collapse of the US currency. The BRICS countries are on the verge of launching their own currency, thereby ending the Dollar’s dominance. The greenback, they say, is on its last legs.
In fact, central banks around the world have significantly reduced their US Dollar reserves in recent years. Ten years ago, the Dollar accounted for around 58% of global foreign exchange reserves; now it is just under 40%. We have already discussed in previous Thoughts that central banks now hold more gold than US Dollars in their reserves.
But it is not only central banks that seem to be giving the Dollar the cold shoulder. A study by Bank of America shows that fund managers have not been as pessimistic about the US Dollar as they are today for 14 years. The data from the futures exchanges speaks for itself: net short. In other words, people are betting against the greenback and in favor of the Euro. And the chart below also shows that whenever fund managers have collectively opposed the Dollar, it has been preparing its comeback in the background.
In contrast, the same breed of fund managers is more optimistic about the Euro than ever before. This would almost seem charming—were it not for the political and economic climate in Europe. Self-doubt dominates the political stage, while industry talks of deindustrialization, accompanied by persistently high energy prices. The current positioning therefore seems less like sober analysis and more like a prime example of a classic contraindication: whenever investors have bet so heavily on the Euro over the last ten years, the European currency has slumped…
The US Dollar also follows a 5.31-year cycle, which has provided astonishingly accurate signals in the past. According to this rhythm, the greenback is likely to experience something of a fresh spring in the coming months.
When a currency rises, it is not necessarily due to its own strength. Sometimes it is enough for the competition to weaken. This is exactly what the next chart shows: the other currencies in the Dollar basket are once again showing signs of fatigue. And when the others stumble, the Dollar automatically stands a little taller…
SWIFT, the central nervous system of international payments, has just published its latest transaction figures for various currencies. And lo and behold—the number of transactions in US Dollars jumped from 46.77% to 50.49% between November and December. A remarkable leap. We suspect that this could have something to do with the rise in precious metal prices.
In any case, this is the highest level since August 2019, when 51.7% of all transactions were briefly settled in US currency. At that time, considerable tensions built up in the Dollar funding market, culminating in the repo stress of September 2019. Liquidity bottlenecks in the global Dollar system forced European and Asian banks to increasingly seek USD funding. Before and after that, however, the share of Dollar transactions was well below the 40 percent mark…
The picture is quite different for the Euro: the number of transactions in the European single currency has declined noticeably in the international SWIFT system over the last few years. There was a real slump in 2023. Sanctions against Russia—and, above all, the exclusion of Russian banks from the SWIFT system—led to a massive decline in Euro payment flows. Sanctions that weaken the importance of one’s own currency…
In previous Thoughts, we have pointed out several times that the US Dollar may not be on the verge of collapse, as many investment experts like to claim. On the contrary, the evidence pointing to a resurgence of the Dollar — or at least to the weakness of other currencies — continues to mount. The debt problem will undoubtedly come to the fore at some point, but possibly first in Europe. This is why European capital is seeking refuge in the US. Against this backdrop of geopolitical and economic developments, we can therefore only partially understand the pronounced Euro optimism of fund managers. If these Euro bets are unwound again, the US Dollar is likely to benefit automatically. Therefore, the rule is: don’t de-Dollarize too early.