Han Dieperink: The premature funeral of the dollar
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
Last Thursday, the surprising US employment figures were released. Less than an hour later, Société Générale had already published a report. The message: the dollar’s heyday is over. The euro rose immediately by 0.7 per cent. And once again, the familiar narrative was heard. The dollar is falling out of favour and the world is slowly moving away from it. It’s a compelling narrative. But it hasn’t come to pass for well over ten years.
The objections to the dollar are well known: the US government saves too little, runs a foreign trade deficit every year, public debt is mounting, and under Trump, confidence in the rule of law is waning. Yet something strange is going on. Those same weaknesses have existed for decades. And it was precisely during that period that the dollar grew ever stronger. Since the low point of the credit crisis, the dollar has risen by around 40 per cent. By the peak in 2022, it had even risen by over 55 per cent. Anyone who sold the dollar all those years because the deficits were high lost money on it.
A strong economy has a strong currency
The main reason for this strength is the economy itself. The US economy has been growing faster than the European one for years. This is mainly because US workers earn more per hour. Since the credit crisis, productivity has risen by about a quarter faster than in the eurozone. And that gap has only widened since 2023. Why does that strengthen a currency? Higher productivity means higher incomes, higher prices and higher interest rates. Those higher interest rates attract capital. And that capital drives the dollar up. So the dollar is strong thanks to the US economy, not in spite of it.
Money flows to where it yields the highest returns. And for the past fifteen years, that has been America. Since 2010, US shares have outperformed the rest of the world by around 180 per cent. For a foreign investor, that amounts to an average of 7 per cent extra per year. That flow of foreign capital into the US is significant. It is the reason why, despite its deficit, the US has never ended up in a genuine crisis. The returns cover the deficit, year after year.
The whole world uses dollars for its calculations. Much trade between other countries is also conducted in dollars. As a result, America must supply the world with dollars. And that is only possible if the country buys more than it sells. Without the US deficit, there would be too few dollars in circulation. The deficit is therefore not a sign of weakness. It is necessary for the system to function. Anyone who uses the deficit as an argument against the dollar is confusing a function with a flaw. The Federal Reserve is not only the central bank of the US, but also of the world.
No alternative in sight
Central banks are holding fewer dollars than they used to. Two decades ago, this accounted for over 70 per cent of their reserves. Now it stands at around 57 per cent. Yet the total amount of dollars has hardly fallen. Central banks have simply added other currencies – and, above all, gold – to their holdings. They have not exchanged the dollar for anything else. And there is no real successor. The Chinese currency accounts for barely 2 per cent. It cannot be freely exchanged, and China keeps a tight rein on capital flows. Gold is an excellent reserve asset, but it cannot be used as a means of payment. As long as no single currency can take over the dollar’s role, it remains indispensable.
The ECB is making life easy for the dollar
And the euro? It is grappling with precisely the opposite forces. European industry has long been in the doldrums. Exports are falling. And yet the ECB is raising interest rates to combat inflation. Yet another classic mistake by the ECB. That supply-driven inflation is mainly due to high oil prices, and the ECB cannot simply print more oil. Higher interest rates do not solve this, but they do slow growth. This actually weakens the euro. Then there is France. The country now has an even larger budget deficit than Italy. Social spending there accounts for over a third of the economy. And with the 2027 elections on the horizon, no politician dares to talk about austerity. The ECB could buy up French debt. But that, in particular, would really put the euro under pressure.
The narrative versus the figures
De-dollarisation is, above all, an appealing narrative. And narratives have a long life on the stock market. Investors have been telling each other for years that the dollar is on its last legs. Through this repetition, it naturally starts to feel like the truth. We confuse a good story with a prediction. And, let’s face it, we find decline more exciting than stability. Anyone who compares the figures with the narrative will see something different. The trend has been pointing upwards for fifteen years. The best is yet to come for the dollar.