The surprise US credit rating downgrade will trigger short-term volatility for the dollar – but more importantly, will speed-up the long-term decline of the US and global reserve currency, warns the CEO of one of the world’s largest independent financial advisory and asset management companies.
The warning from Nigel Green of deVere Group comes as rating agency Fitch downgraded the US government’s top credit rating on Tuesday to AA+ from AAA.
Fitch cited fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that puts at risk the government’s ability to pay its bills.
The deVere CEO says: “Many US analysts are predicting that this surprise downgrade of the world’s largest economy’s credit rating will only trigger short term volatility for the dollar – and the US and global reserve currency wobbled on the news, as should have been expected.
“However, as this is the second major rating agency (after Standard & Poor’s) to strip the US of its triple-A rating, there are serious, legitimate questions to be asked about the long-term trajectory of the dollar.”
He continues: “No one can predict the future, but history unequivocally teaches us that nothing lasts forever. Global reserve currencies have come and gone before. It will happen again.
“Indeed, I believe that we are witnessing in real-time the world beginning to shift away from a dollar-dominated financial system.
“Among other reasons, this is because astronomic levels of debt, and the enormous amount of desperate money printing to monetise these debts, have caused the considerable drop in the long-term value of the currency.”
Earlier this year, Nigel Green was one of the first voices to flag the threat to the US dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trades.
He said one of the most significant, but under-reported, outcomes of a three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements.
Separately, two deals, announced a week earlier, will see Saudi Arabia’s Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China’s top provider of the commodity. It was reported that Saudi Arabia was also in talks with Beijing to settle with the yuan instead of the dollar.
“It appears US rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan, that would lead to an enormous shift in the global economic system.
“Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars. This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars in order to do so.
“If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.”
This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets.
Investors should begin to consider hedging against a declining dollar. Diversification across different currencies, investing in non-US assets, using derivatives, and investing in commodities and real estate are all considered effective ways to hedge against potential USD volatility.
The deVere CEO concludes: “While the latest report from Fitch will have a minimal impact, two major credit downgrades, industrial-scale money printing to monetise astronomic debts, and rivals like China and their allies looking to take the financial crown from the US, can be expected to speed-up the long-term decline of the dollar.”