Will King Dollar lose his crown?

China is a rising power; could its currency supplant the dollar?

(Image credit: © GREG BAKER/AFP via Getty Images)

published 20 August 2021

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“Will the fall of Kabul now bury belief in a world led by the US as its sole superpower?”, asks Louis-Vincent Gave of Gavekal Research. Can “US military prestige survive a defeat at the hands of untrained farmers driving Toyota pickups?”

The US has bounced back from military disaster before. But events in Kabul could come to mirror Suez. Declining US prestige is bullish for gold (the ultimate safe haven) and oil (because of the risk of “heightened tensions in the Middle East”). It is also “bullish for the renminbi… as China is the rising power in Asia”. Above all, it could prove “bearish for the US dollar”.

The US dollar is the world’s leading reserve currency. Investors turn to US assets as a safe haven in times of turmoil. Worries that the Delta variant will hurt global growth have thus given the greenback a boost of late. The US dollar index, which tracks the currency’s value against a basket of six major trading partners’ currencies, has gained 3.5% this year.

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Journalists sometimes say they are surprised that US failures don’t have a more negative effect on the dollar, says Robert Armstrong in the Financial Times. “I’m always surprised US stocks don’t go up more.” US disasters make the world more dangerous; “when the world is more dangerous, the place to be is American assets”.

The outlook isn’t necessarily bearish, says William Watts for MarketWatch. Some say America’s departure from Afghanistan frees it up to focus on its traditional allies. Ultimately there are few alternatives to the dollar. China’s renminbi faces formidable hurdles to becoming a safe-haven currency. The dollar’s biggest rival is the euro, but for now the “euro-denominated debt market isn’t… of the size and liquidity needed to meet the needs of global investors”.

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.