Gradual movement toward a multipolar currency system
No immediate threat to dollar dominance, but ongoing diversification
The euro remains limited by market fragmentation and lack of unified sovereign rating
The more unpredictable US policy becomes, the more other countries might look for alternatives to the dollar
For the past two years, offshore investments — especially international company shares — have been delivering solid returns, thanks to growing investor confidence. But is that feel-good streak losing steam and what should investors looking to diversify offshore look at?
These factors are in focus for investors who dont read too much into short term focus:
Long-term state of dollar dominance
US trustworthiness as an international partner
Weaponisation of financial sanctions
Threat of Emerging Payment Systems
Quirk Mothei, the Equity and Fixed Income Analyst at Allan Gray Botswana, an asset manager, observed recent signs of global sentiment turning negative as a consequence of elevated volatility due to significant pronouncements on tariffs by the President Donald Trump administration in the United States.
Local pension funds have largely seen growth of their assets due to favorable growth conditions offshore, especially in the US equities market.
Inkunzi Investment’s Monday report showed that:
WallStreet futures were lower the past week as Trump’s comments pushed a rush to the safety of gold with investors bracing themselves for reciprocal tariffs on US trading partners. Trump imposed tariffs on aluminum, steel and autos, with an increased target on all goods from China.
Asian stocks were down after Trump unveiled 10% tariffs on most imports as well as higher reciprocal duties in some countries.
Expectations of the kind of policies received from the Trump administration have been what markets were absolutely fixated on since the announcement of the election result in November 2024.
But it looks like the equity market miscalculated the extent of the tariffs, based on the sell-offs.
Equity Rally
“You will recall that initially, the US equity markets rallied quite strongly, given the odds that the Trump administration would bring in a new focus of deregulation,”
Standard Chartered Bank’s Razia Khan, the Head of Research and Chief Economist, Africa & Middle East said in Gaborone last week when reflecting on tariffs imposed by the US.
In February Max Castelli, Head of Strategy, Sovereign Institutions, UBS Asset Management, told Mark Sobel, US chair at OMFIF that Trump’s proposed policies were seen as “pro-growth” – tax cuts and deregulation that could boost the economy.
Khan said the financial sector in particular was to be a big beneficiary of the deregulation.
Other key factors which she said played a key role in the positive outlook were:
The Fed had already concluded its tightening cycle.
The US growth was a lot stronger than other G4 economies, despite all of that tightening.
“We weren’t really seeing at that point in time, signs of slowing down of the economy. It looked as though the Fed had successfully managed to bring headline inflation down to more moderate levels,” she said adding that “there were expectations that there would be interest rate easing”.
“The markets were very measured in their outlook. Equity markets focused on this idea of deregulation unleashing a new way to grow.”
Fed Warns of Elevated Risks of Unemployment, Higher Inflation
On Friday after Trump’s announcement, Federal Reserve Chair Jerome Powell said:
“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation”.
In the short term, Castelli believes this might actually make the dollar stronger as the Fed might keep interest rates higher to control inflation.
Inflation could hurt the Dollar
But he said if inflation gets out of control, it could hurt trust in the dollar long-term.
According to MarketWatch:
U.S. Dollar Index (DXY), which measures the dollar’s value against a basket of major currencies, fell by nearly 4% during the first quarter of 2025, .
The dollar declined after Trump’s announcement but clawed back losses. Usually uncertainty is good for the dollar.
But Reuters reported a ‘violent US treasuries sell off the evoked the COVID-era dash for cash’, challenging their safe haven status.
Is the US still the best place to invest?
Howard Marks, the co-chairman of Oaktree Capital Management told Bloomberg that it’s probably still the best place. But he said it’s less best than it used to be.
“If you think about the things that made it the best place, one of them was the rule of law. That may be less the fact today. One of them was the predictability of outcomes that may be less today.”
Bond Market Signaled Inflationary Impact Of Tariffs
Market analysts observed a marked divergence between what was seen with US equity market performance and a sentiment reflected in bond markets.
Fears were being reflected in bond markets, according to Khan, pointing to the potential inflationary impact of the tariffs.
US Exceptionalism
US exceptionalism had a lot to do with the scale of the US fiscal deficit that the government has been running. Almost three times the norm of what would be considered to be standard for developed markets.
“So instead of the deficit of around 2% of GDP, which is often seen, we have seen something closer to 6% to 7% in the US,”
said Khan.
A key question is, how will the US actually finance this scale of deficit?
“The US of course, has been very dependent on the rest of the world pulling its savings into US markets,”
Khan said.
Foreign Holdings of US Treasuries Hold Steady
On Monday, Reuters reported that:
Foreign holdings of US treasuries held steady at $8.526 trillion in January from December 2024.
The December holdings were the lowest since February 2009 when the country’s stock of Treasuries dropped to $744.2 billion.
US Golden Credit Card
“The thing about investing in the United States for many years has been our fiscal situation, our deficits and debts, and the US has behaved like somebody who has a golden credit card where there’s no credit limit and the bill never comes,”
Marks said.
“But can the events of the recent days change that? Can they cause there to be a credit limit? Can they cause a bill to be presented at some point in time? And if the answer to either or both of those questions is yes, that’s a real risk.”
Marks believes that if people don’t like the dollar, don’t like investing in the United States, don’t want to hold an unlimited number of treasuries, and the US just makes people mad,” some may actually say “I don’t want to hold their debt because of how they’re treating me, then the fiscal situation will be very complicated.”
Current State of Dollar Dominance
According to Castelli, the dollar dominance remains strong in the short term.
However, he said there has been a gradual decline from over 65% of global FX reserves in 2016 to below 60% currently.
UBS surveyed central banks in the past year. They asked central banks about which currency would benefit most from de-globalisation and protectionism.
According to Castelli, the Survey Results from UBS showed:
Half believed the US dollar would benefit as it remains a safe haven currency
Half believed the Chinese RMB would benefit in this new global environment
Castelli believes this split shows there’s significant uncertainty about the future.
China’s Evolving Strategy
Old Strategy:
China previously focused on getting the RMB (their currency) into other countries’ foreign exchange reserves.
This effort had some initial success but has stalled – RMB’s share in global reserves is no longer growing, according to Castelli.
New Strategy:
Instead of pushing for RMB in reserves, Castelli said China is focusing on getting more people to use RMB for everyday international trades.
The thinking is: If more companies use RMB for buying and selling goods, its role in finance will naturally grow.
This is a more gradual, “bottom-up” approach, according to Castelli.
Balancing Act:
China faces a challenge: Castelli said they want their currency used more internationally, but they also need to keep it stable.
This is especially tricky now with their economic slowdown and potential pressure from US tariffs.
Castelli said they’re being cautious about fully opening their financial markets because it could make their currency harder to control.
According to this Tuesday’s Financial Times report, China has fixed the renminbi at its weakest level in 18 months in the first sign it will permit currency depreciation to offset an escalating trade war with the US.
Longer term factors could affect dollar dominance
Macro policies:
Trump’s pro-growth,
Potentially inflationary agenda
US trustworthiness as an international partner:
This is about whether other countries see the US as reliable and stable. There are concerns about potential conflicts between US institutions (like Trump vs. the Federal Reserve).
If the Fed’s independence is questioned, Castelli believes it could reduce confidence in how well inflation will be controlled.
Trump’s approach to tariffs is also important – major tariffs against many countries (not just China), could damage international trust,
according to Castelli.
Weaponisation of financial sanctions:
The US has been using its financial power to punish other countries by blocking them from using dollars.
A key example is freezing Russia’s central bank assets.
Castelli believes this makes other countries nervous – as they think ‘if Russia today, maybe it’s us tomorrow’. Trump has reportedly suggested using the dollar as leverage to make countries align with US priorities.
As a result, Castelli observed that some countries are looking for ways to rely less on the dollar.
Threat of Emerging Payment Systems
The BIS Mbridge Project
This is a project led by the Bank for International Settlements (BIS).
It uses blockchain technology (called DLT – Distributed Ledger Technology) to enable instant cross-border payments.
The goal is to make it easier to send money between countries without necessarily using the dollar.
However, Castelli noted that the project remains relatively small.
Recently the BIS has started pulling back from the project, particularly as BRICS countries (Brazil, Russia, India, China, South Africa) began portraying it as a way to bypass the dollar.
Central Bank Digital Currency (CBDC)
Castelli believes that CBDCs could potentially make secondary reserve currencies easier to use.
These are digital versions of national currencies, issued by central banks.
The key potential benefit: They could make it cheaper and easier to use non-dollar currencies.
Currently, Castelli said using dollars is often the cheapest and easiest way to do international business.
If CBDCs make it just as easy to use other currencies, he said countries might reduce their reliance on dollars.
However, Castelli doesn’t see this causing any dramatic changes in the near term.
The more unpredictable US policy becomes, the more other countries might look for alternatives to the dollar.
