With inflation and energy prices setting records, many investors are wondering what it means for the future of the US dollar.
Over the past year, inflation has significantly reduced the value of the dollar. Most other major economies are experiencing similar inflation and supply chain problems. In the United States, inflation has been accompanied by strong economic growth and exceptionally low unemployment. Many other countries are continuing to struggle economically and have not had the benefit of a strong labor market. Despite recent inflation, holding dollars has still been better than holding most other currencies.
China is reported to be in talks with both Russia and Saudi Arabia to price oil sales in the Chinese currency rather than in US dollars. Some investors are worried that this could mark the end of the dollar as the global reserve currency.
The world consumes over 90 million barrels per day of oil. China imports 7.6 million barrels of oil per day, including 1.5 million barrels per day from Saudi Arabia. Even if the Saudis were to accept the Chinese Yuan as payment for all the oil they sell to China, this would represent less than 2% of total global oil sales. China is Saudi Arabia’s largest trading partner, so no matter whether their oil sales are priced in Dollars or Yuan, a considerable amount of those revenues will be turned around and sent back to China to pay for goods.
The US dollar is still in demand worldwide. Relative to the currencies of countries we trade with, the dollar is stronger now than it has been for most of the past fifty years. There is widespread confidence across the globe in the US dollar. The dollar didn’t become the world’s reserve currency by accident. Confidence in the dollar comes from the strength of the US economy and the US military. It comes from the size and stability of our capital markets, the innovation of American businesses and workers, and the protections for free enterprise that are enshrined within our legal system. As long as America continues to be herself, dollars will remain in demand.
Dollars are still in demand across the globe. The US dollar is backed by the world’s strongest economy, the world’s most capable military, the world’s largest and most stable capital markets, and the world’s best legal protections for free enterprise.
History shows that even a low level of inflation is enough to significantly reduce your purchasing power over time. It is extremely important to invest in assets that will beat inflation over long periods of time, like dividend-paying stocks. The dollar is in no danger of collapse, but it is still important to protect your wealth by investing wisely.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer