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Dollar Dominance Is Fading As China Grows and Sanctions Expose Risks: Dalio

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  • Global central banks are less willing to hold the dollar, billionaire investor Ray Dalio said.
  • One reason is that China’s share of global trade is rising while the US share is falling.
  • Another is that Western sanctions against Russia have exposed new risks for holding dollar assets.

The dollar’s dominance is fading as the greenback’s importance slips in global trade while Western sanctions against Russia have exposed new risks to holding the currency, billionaire investor Ray Dalio said.

Central banks are less inclined to hold the dollar, the Bridgewater Associates founder said last week in an interview on the Julia La Roche Show.

“Dollars are debt. In other words, when one holds a dollar — a central bank — they hold a debt asset,” he said. “So the holders of that would say, ‘I’m already over-exposed to US dollar-denominated debt.’ And so there’s less of an eagerness to buy.”

For Dalio, the reason nations previously have been willing to expose themselves to such debt is to be able to trade internationally, given the dollar’s widespread use in global transactions. In fact, the dollar is a part of 88% of all foreign-exchange trades.

But, with China increasing the yuan’s use in global trade, the future necessity for the greenback may be ebbing. 

To amplify the yuan’s presence, China has been promoting trading agreements that oblige non-dollar transactions. Most recently, it did so with Brazil, adding to similar arrangements with countries such as Kazakhstan and Pakistan.

Meanwhile, ever since Russia became ostracized by the Western world for its invasion of Ukraine, its economy has shifted toward the yuan. After the war started, Russia saw $330 billion currency reserves frozen, preventing Moscow from transacting in dollar- or euro-based assets internationally.

Those sanctions “increased the perceived risk that those debt assets can be frozen in the way that they’ve been frozen for Russia,” Dalio said.

“So for those reasons, there’s less desire to hold US dollar denominated debt, which means yes, less US dollars,” he added. “So the supply-demand picture is worsening particularly as we continue to have to sell them internationally to fund the deficit.”

His warning echoes a recent note from Eurizon SLJ Asset Management, which said the dollar’s dominance as a reserve currency eroded last year at 10 times the pace that was seen in the prior two decades.

Dalio has previously sounded the alarm on global reserve currencies. In February, he told CNBC that, “We are in a world in which money as we know it is in jeopardy. We are printing too much, and it’s not just the United States.”

Not every analyst shares Dalio’s point of view, as some see the yuan’s growth as irrelevant. 

Most recently, Nobel economist Paul Krugman says the dollar will remain dominant, given its incumbency, free market flow, and the fact that it’s backed by a reliable legal system.  The only threat to the dollar is a debt default, he added.

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