Miran, a supporter of the Liberation Day tariffs, argues that the dollar’s reserve status causes persistent currency distortions, making US goods less competitive and contributing to unsustainable trade deficits. “As global GDP grows, it becomes increasingly burdensome for the US to finance the provision of reserve assets and the defence umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs,” Miran writes.
Meier says measures to reduce imbalances could encompass forced debt swaps or capital confiscation, which affects property rights and would seriously undermine the safe-haven function of US assets.
“Larger risks could come from fiscal policy, with Trump’s ‘big, beautiful’ tax bill promising to prolong temporary tax cuts from his first term and to further cut corporate taxes, against the backdrop of a gaping budget deficit. A possible securitisation of investments in US assets, reducing inflows into US government debt given the twin deficit, constitutes the most concrete case for US dollar weakening,” Meier suggests.
Other storms are brewing. In a report also dated May 26, Bank of America (BofA) warns that it sees two channels for de-dollarisation to take effect in Asean — first via hedging of foreign assets of domestic investors, including pension, insurance and mutual funds, which may result in more swift moves; the second channel affects corporates, retail investors and financial institutions by drawing down onshore USD deposits.
See also: US-China trade truce: Reprieve or realignment?
The BofA report points out that since 2022, the pace of accumulation of USD deposits in the onshore banking system has picked up sharply due to USD appreciation and higher US deposit rates.
“Consequently, FX deposits in most of Asean are near the highs, with a total of US$230 billion [$295 billion] across the Asean-4 economies of Indonesia, Malaysia, Thailand and Philippines,” BofA says. A conversion of these deposits back into local currencies will be a medium-term trend, it adds.
“Ongoing themes behind USD weakness include US policy credibility, fiscal concerns or the end of US exceptionalism,” BofA says.
See also: Beyond the trade truce: Why Chinese stocks deserve a nuanced approach
At present, fiscal concerns are taking centre stage. On May 16, Moody’s downgraded America’s credit rating from triple A to Aa1, the last ratings agency to do so. In 2011, S&P Global cut the US’s credit rating to AA+ from AAA, and in 2023, Fitch did likewise.
As it is, the portion of US dollars as part of countries’ foreign reserves has fallen in the last 10 years, from more than 65% in 2016 to 57.8% in 2024. With the exception of perhaps the euro, no other currency is in a position to be the next reserve currency.
With these uncertainties, and in the wake of the current US administration believing that the cost of the USD being a reserve currency is too high as purported by Miran, the greater risk is that no currency is ready to be the next global reserve currency. What happens then?
Gold as a hedge against the USD
How about some gold? It is interesting to note that the US is the largest owner of gold reserves, followed by Germany, the International Monetary Fund, Italy and France, according to the World Gold Council. Developed markets have more than 70% of their reserves in gold. It’s no surprise then that emerging market central banks such as the People’s Bank of China and the Reserve Bank of India are the largest buyers of gold, which comprises just 6% of China’s foreign reserves and 13.5% of India’s foreign reserves.
Demand for gold comes from jewellery, followed by investment in bars and coins, central banks, ETFs and technology including dentistry and AI, based on data from the World Gold Council. Gold supply comes mainly from mining (roughly 70%) and recycling (approximately 30%).
“We think, against a background of the escalating trade war and tensions, that central bank demand will be one of the core reasons why gold demand can be sustained into the future,” says Robin Tsui, APAC gold strategist at State Street Global Advisors.
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Tsui adds: “That’s why there’s more room for emerging market central banks to ramp up the target of their gold holdings. They don’t have a target, but we do believe they may at least want to be in line with the average, which is 20% globally.”
He goes on to suggest that institutional portfolios are diversifying into alternatives of which gold is a part. “If you have a 60:40 portfolio, you can have 5% in gold, where you can take 2.5% from equity and up to 5% from fixed income, because gold has a low correlation with both bonds and equity,” Tsui suggests
S&P 500 outperforms gold by a wide margin
The argument against holding more than 5% of a portfolio in gold is that the stock market always outperforms. Over the past 33 years, the S&P 500 has outperformed gold by a large margin. For US$10,000 invested in gold and the S&P 500, the latter returned almost three times more than gold based on price alone.
On the other hand, if the world global order changes, and investors are looking for a hedge against the USD, gold provides that hedge.
In addition to physical gold either through jewellery or gold coins and bars, the easiest way for retail investors to invest in gold is through ETFs. In partnership with State Street Global Advisors, the World Gold Council launched SPDR® Gold Shares (GLD) in 2004. Since then, more than 90 gold-backed ETFs have been launched around the world.
The SPDR ETF is fully backed by physical gold and is easily accessible on either the Singapore Exchange(SGX) where it is priced in both USD and SGD, and the New York Stock Exchange (NYSE) where liquidity is a lot higher.
Source: Evolution
