In an interview with Bloomberg’s Odd Lots podcast, Zoltan Pozsar of Credit Suisse AG said the Russia-Ukraine war could be the start of a turning point for the U.S. dollar. He noted that wars can cause major shifts for global currencies, and as Russia is denied access to its foreign currency reserves, other countries may begin to rely less on their own reserves—including U.S. dollars that global reserve managers keep for safety.
Last year, the Biden Administration also seized Afghanistan’s cash assets during the Taliban takeover, and as countries realize that their reserves may not be safe under all circumstances, their central banks may begin to diversify away from the dollar. The result could be a new order where countries aren’t as interconnected monetarily as they are now, Pozsar contends.
In the interview with Bloomberg, Pozsar divides the type of money held by governments into two categories: inside money (money that the government is owed) and outside money (physical cash, cryptocurrency, or gold). Most reserves in existence are inside money, meaning it’s held by someone else. In January, Russia was holding over $120 billion worth of gold, and now that they’ve lost access to dollars and euros (their inside money), that gold is all they have. Pozsar foresees a possible future where a central bank whose currency is under pressure would instead have to anchor their currency to something other than cash, like gold. The more countries that do this, the weaker the dollar becomes. An example would be China dumping all of its dollars out of its reserves before invading Taiwan.
Other strategists have echoed Pozsar, with Dylan Grice of Calderwood Capital going so far as to call it the “weaponization” of money and Steven Englander of Standard Chartered Bank saying that “the logical response if there is a risk that you will be on the receiving end is to see what you can do to immunize yourself.” Indeed, Russia began doing that in 2018 when it sold off all of its U.S. Treasuries and bought gold instead. Of course, other countries looking to make the same move need to find something else to buy, and while gold is an obvious choice, it’s a finite resource. Asian currencies or bonds could be another candidate, but it would be difficult for countries like Russia or China to keep their money there as those markets are smaller and less liquid than the U.S. and E.U.
But while many experts have made dire predictions about the dollar’s dominance waning over the years, especially after the 2008 financial crisis, the U.S. currency still holds a significant place in the global economy and it’s only been strengthened since 2008 as the Fed stepped into a globalized role to help bail out financial systems around the world. The dollar has become hard to compete with, says Bloomberg strategist Cameron Crise, as there isn’t really “anyone other than the United States has both the ability and the will to ‘manufacture’ safe assets and sell them to foreigners as the bedrock of a global financial system.”