The U.S. dollar’s demise as the global reserve currency isn’t imminent, but a threat looms as the Federal Reserve and global central banks increasingly monetize government debt, billionaire investor Ray Dalio warned in a Tuesday interview with Bloomberg Television.
“ ‘There is a threat. It’s an evolutionary type of process. There’s not yet a good alternative in the form of a currency, per se.’ ”
Large institutional investors aren’t necessarily running out to embrace alternative currencies, because the yen and the euro have the same problem as the U.S. dollar, he said. Instead, investors are looking for new store holds of wealth, including equities, gold and “other asset classes that go up.”
The threat, as the Fed and other central banks commit to buy huge chunks of a rising tide of government debt, is that investors grow wary of low yields and begin dumping bonds. That could put upward pressure on currencies, which would be bad for other assets, possibly forcing the Fed and other central banks to further step up debt purchases, serving as a “currency defense mechanism” — a process that could make for a dangerous spiral, he said.
That would put central banks in the awkward position of serving as a “currency defense, mechanism” he said.
The ICE U.S. Dollar Index DXY, +0.05% is down 5.7% so far this year and has dropped nearly 10% from its March high, which was scored amid a global scramble for dollars as the COVID-19 pandemic rocked global financial markets.
The dollar’s slide has prompted debate, with some analysts arguing the weakness in part reflects growing worries about the stability of the U.S. political system and other institutions, while others contend the weakness is largely just a reflection of an improved outlook for global growth.