Is The United States Dollar Losing Its Importance?

When I was young during the 80s and 90s, I remembered those crime thriller movies and series where the bad guys would often demand United States Dollars (USD) for illicit goods transactions and/or ransom amount. Being a naïve kid, I asked my parents why it must be in USD and not Hong Kong or Singapore dollars since the shows were set in those countries, to which they replied, “because it is the most powerful currency in the world”.

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Since the Bretton Woods system started in 1944, USD had slowly gained its ascendancy over the previously dominant currency, the British pound. While the system eventually ended with the delinking of gold to the USD in 1971, and the subsequent rise of other currencies such as the Japanese Yen, Euro, Swiss Francs and later the Chinese Yuan, the greenback (a common nickname for the USD notes) still held its supreme status as of 2024, with it being the world’s reserve currency and accounted for 89.8% of foreign exchange transaction volume, 58.2% in official foreign exchange reserves, and 47.9% in international SWIFT payments¹.

In recent years, however, there has been talk of USD losing its top status, especially with the buzzword “de-dollarisation” being bandied about. The current U.S. administration’s trade policies (tariffs, tariffs and more tariffs, implied or real), the threat of another reserve currency replacement from BRICS countries (Brazil, Russia, India, China, South Africa, and some others), the rise of gold holdings in foreign reserves, and the downgrades by rating agencies of U.S. credit ratings, among other news, spelt some pessimism for the USD. 

In my opinion, the scenario of de-dollarisation is not going to happen, not at least in the space of two decades, and even so, it would be gradual, not overnight like falling off a cliff. There are a few reasons for this.

First, when compared between 2014 and 2024, the amount of USD in foreign exchange transactions and international SWIFT payments had risen 7.1% and 2.9% respectively, and the U.S.’ share of global gross domestic product (GDP) increased by 3.3% to 26.5%². The use of USD is still prevalent, and for the next two places down the line, the Euro and the Japanese Yen (who are not part of BRICS), stood at around 31% and 17% respectively (as of 2022)³. It would take a huge undertaking and a global shake-up more disruptive than tariffs, to usurp this current order.

Second, a global reserve currency would need to have characteristics that include global acceptance, stable political and strong economy, and liquidity. The latter is important especially when capital and transactions are needed to cross borders easily. 

Third, the U.S. economy is still a powerful entity for its global companies, strong consumer market, huge source of capital and an incubator for innovation. Though the world is polarizing and signs of autarky amongst regions and countries are increasing, trading with the U.S. is unavoidable as the globalized trade network is still in place. The recent deemed rush of tariff negotiations by countries with the U.S. had clearly shown the importance of this network.

For most investors, the important question coming out of all these would be: is the U.S. still investible?

My answer is: yes, for now.

 

1 – Buchholz, Katharina. U.S. Dollar Defends Role as Global Currency. 22 Jan 2025. https://www.statista.com/chart/30838/share-us-us-dollar-in-global-economy-global-financial-transactions/(accessed 26 May 2025)

2 – ibid

3 – Triennial Central Bank Survey. Bank for International Settlements. 27 Oct 2022. https://www.bis.org/statistics/rpfx22_fx.pdf (accessed 26 May 2025)

 

Disclaimer

The Quandary Of Rebalancing

The two main ways of rebalancing one’s investment portfolio are either through cash injections, or the selling of an asset class and buying into another. During rebalancing, some investors may face a dilemma of sorts in the form of opportunity costs (or reinvestment risk, depending how one views it), and the need to maintain the portfolio asset allocation. 

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Putting it into an example of a simple equities/bond portfolio, at the point of rebalancing, the equities portion is already over the allocation, yet an investor is not willing to tip the scales over to bonds due to its current lower returns compared with equities. If this investor goes ahead with plowing more into equities instead, he/she had defeated the purpose of rebalancing, and subsequently diversification.

Unless the portfolio is concentrated for a known purpose or for trading, having a heavily skewed investment portfolio would bring unnecessary risks. Yes, one may forego the additional gains and yields that the additional capital may bring, but for the sake of portfolio preservation and being in the comfort zone of one’s risk tolerance and appetite, rebalancing is a must-do.

Borrowing a saying heard in team sports:

No player (asset) is bigger than the team (portfolio) itself. 

Regulatory, Liquidity And Counterparty Risks

We are rapidly seeing the increase of multiple polarisations of geopolitical blocs and the complicated world order that we may be heading into, and these may amplify some of the risks that most investors tend to overlook. Most of us would associate risks as total loss of an investment due to market and economic forces, but we need to be aware of other forms of risks that, though the probability of it happening may seem be remote. Examples of these risks are regulatory, liquidity and counterparty risks.

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Regulatory risks are events where regulations, legislation and/or standards have a negative effect on certain sectors/industries. There are a few examples, one of which is the ever-present government antitrust suits against the technological giants.

Liquidity risk, from the market perspective, is one where a counter could not be sold, or liquidated, in required time, because of low or no demand for it. Some may have experienced liquidity risk when their shares/bonds were suspended on an exchange, oftentimes stuck there almost forever.

Counterparty risk is the failure of the other side (i.e., the counterparty) in carrying out their obligations of a financial transaction, such as the delivery of securities after payment has been made, or the failure of a bond to distribute a scheduled coupon payment.

After having introduced the risks and bringing back to the point said in the first paragraph where these risks are amplified, the growing geopolitical tensions would probably have, or had have, them manifesting as a sequence of events. A famous instance was the SWIFT (pun intended) sanctions placed on Russia the moment they invaded Ukraine, which led to, among others, the severance of the Russian market from Western investors. Regulatory risk (brought about by sanctions), then liquidity risk (unable to access the Russian markets to liquidate holdings) and at the same time, counterparty risk (defaults occurred in the trading of Russian securities individually or by fund houses).

While accordingly investors had gotten back their monies from their respective exchange traded funds (ETFs) that had Russian securities, the period in-between would be harrowing especially for those who may have a huge position in them. This is a clear demonstration that governmental actions could bring about a huge dent in one’s investment portfolio.

The abovementioned scenario could well play out if non-Western region or country is trying to do something funny in the great global game, and I could probably hear murmurs of turning away from global diversification and stick to local companies for safety. However, the best way to manage these risks is diversification itself.

Some may view this blogpost as scaremongering, but I must highlight that all investments carry risks, and it is up to the individual to determine the probability and one’s weightage of each of the risk types happening. Via diversification along the descending degree of asset classes, regions/countries, sectors/industries and then companies, and along with portfolio sizing (in my opinion, not more than 12% holdings for a company or a sector-based ETF), losses can be mitigated and limited in contrast to a wipeout had one instead concentrated. 

Disclaimer

Maximising Returns

Many times, I have been hearing others on the hypotheticals of getting rich from certain assets/securities if he/she had gone in earlier (GameStop, anyone?). Similar for portfolio make-ups, where certain asset allocation provided the best returns for certain periods.

For the above to happen, one’s foresight would truly need to be accurate, but as I had shared countless times, no one can predict right to the exact detail, so there is no point lamenting on missed chances. 

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I acknowledge that it is in the interest of every investor and trader to maximise their returns from their investments and positions, but it is near impossible to win all the time. The best one could do is to stick to one’s plan that works, perform due diligence in carrying out portfolio building and fundamental analysis, and realise that ups and downs are inherent in the investing/trading journey.

Though it is good to know about how much returns investing greats and some individuals on social media generate, it is preferable to gain some insights and learning points from them, rather than invoke feelings of envy and jealousy. Everyone’s financial journeys and objectives are unique from one another.

Disclosure

The Bedokian is not vested in GameStop.

Disclaimer

Dark Side Factors That Could Derail Your Investment Portfolio

As part of the Star Wars Day (May the Fourth) special, I will share a post on dark side factors that could derail an investment portfolio.

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Dark Side Factor #1: No Diversification/Under-diversification

Imagine an investment portfolio that consists of only one counter, and if anything extreme happens to it, be it a company bankruptcy or a bond default, the whole portfolio goes poof. In non-extreme cases, a price drop of its securities would bring put a big dent, since basically the portfolio equals to that one counter.

Going further, though with the safety of numbers, there is this risk of under-diversification as well, especially if investments are on basically one sector/industry and/or one region/country. Think about an event that affects the entire sector/industry (e.g., airlines and travel during the COVID19 pandemic) and/or country/region (e.g., the Asian Financial Crisis of 1997) and what would happen to the portfolio.

The answer to deal with this would be adequate diversification, and for the Bedokian Portfolio’s case ranks in the following order: asset classes, region/country, and sector/industry. In this way the risks are spread, with the downside mitigated due to the net effects of correlation between the counters.

Dark Side Factor #2: No Rebalancing

Rebalancing and diversification go hand in hand, thus even with diversification done but with no rebalancing performed, there is still a danger to one’s portfolio. Allowing an asset class to deviate from the preferred or designated allocation would create concentration risk akin to #1, lost opportunities to invest in other asset classes at their lows, and not to mention compromising an investor’s risk tolerance when the portfolio moves away from the set make-up.

Rebalancing can be done in two main ways: either passive or active. Passive rebalancing is usually done periodically, e.g., quarterly, half-yearly or annually. Active rebalancing involves re-allocation to the portfolio make-up constantly or within a short period. Either way, if it is done, one will be steered away from the dark side.

Dark Side Factor #3: Getting Emotional

The Jedi practised emotional control so as not to be affected by them, and this extends to how one should manage their portfolios whether during happy and crunch times. Many times, I have had heard of the phenomenon of “buy high sell low”, and dumping everything to “run for the hills”, only for the investor to regret the decision later.

The markets and the economy go through a boom-and-bust cycle, which is part and parcel of the investment journey. As said countless times, stay calm, enjoy the ride, be rational and carry on investing, for its time horizon is long.

 

Dark Side Factor #4: Not Sticking To The Plan

It is good to fine tune a portfolio methodology and make-up to suit one’s preference and risk tolerance, but to do it extremely (e.g., switch totally from equities to cryptos, etc.) and/or frequently (e.g., Bedokian Portfolio this year, 60/40 equities/bonds next year, etc.) would likely bring lower returns and unnecessary risks than one had not made the change in the first place.

When embarking on the journey of investing, it is recommended to know one own’s objectives and risk appetite, and also read up to learn about it, which I had covered here and here respectively. Once these are in place and the investing philosophy and methodology established, it is easier to carry out according to plan, and perform tweaks down the road.

Dark Side Factor #5: Leverage

While using leverage could increase returns based on what some investing books had stated, for the uninitiated it could prove to be a handful when one need to monitor the portfolio and the borrowings simultaneously. With an even greater leverage on leveraged products, where returns and losses are heavily amplified, the risk of margin calls is greater.

When utilising borrowings, it is important that one should have a clear understanding of what he/she is doing, and the advantages and implications behind them. 

 

May the Fourth be with you.