A strategy to carry

How to play the decline of the dollar

- SANJEEV PANDIYA

Everyone is worried about the future of the world’s reserve currency - the dollar. The situation is not the same as in 2008, when there was a global knee-jerk during the risk-off trade (i.e., investors and traders getting out of risky assets). This time, however, the cost of insuring against a US default (through a credit default swap) has risen above that of 2008 as the markets are scared of a government default in June.

 

But why fuss about it now?

The immediate causa proxima is the over-reach of the ‘Sanctions Regime’ by the US in trying to clamp down on Russia (and Iran-Venezuela before it) by confiscating their dollar reserves.

Imposing sanctions like freezing nearly half ($300 billion) of Russia’s foreign currency reserves and the removal of major Russian banks from SWIFT (a global messaging system for banks that enables cross-border money transfer instructions) has made many other countries realise that the US could “weaponise” the dollar against them as well.

This has set off a kind of bank run on the dollar, visible below the surface. Almost everyone outside the US allies is looking for an option to hold their store of value in a non-dollar holding.

Importantly, a large number of sins of the US government that were earlier forgiven (large twin deficits - a high current account deficit and a high fiscal deficit - both funded by foreign central banks) will now suddenly be remembered and will come home to roost.

How did this all come about?