Evidence of "de-dollarization" around the world remains scant, but many major investors fear a gradual drawback from U.S. assets is now inevitable and the dollar's exchange rate may have to fall further to clear the market. The debate about the U.S. dollar's dominant role in global trade, reserves and investment portfolios has smoldered for decades, but it has reached a crescendo during the turbulent first few months of President Donald Trump's second term in the White House. Get a look at the day ahead in European and global markets with the Morning Bid Europe newsletter. Sign up here. Advertisement · Scroll to continue
Report This Ad European Central Bank boss Christine Lagarde, opens new tab recently put a spotlight on this shift in market thinking, noting "highly unusual cross-asset correlations" involving simultaneous drops in the dollar, Treasuries and U.S. stocks after Trump's import tariffs announcement in April. Spooky April correlation of dollar, stocks and bonds Spooky April correlation of dollar, stocks and bonds But despite all of the de-dollarization noise, there are still no clear indications of a mass withdrawal from dollar assets at large. In fact, some investors dismiss these fears altogether given the pattern of the past 10 years. Bank of America strategist Ralph Axel argues that despite all of the speculation, the world has actually been "rapidly dollarizing" over the past decade - at least in the sense that dollar liabilities have expanded enormously. Advertisement · Scroll to continue In a research report on Thursday, Axel points in particular to the growth of the so-called shadow banking system, otherwise known as "Non-Bank Financial Intermediation", or NBFI, and refers to the universe of investment funds, private credit firms and even crypto funds that exist outside the regulated banking system. All dollar liabilities are effectively "money" in the sense that they can be sold for dollar cash and are thus ultimately claims on the Federal Reserve. Some of these liabilities are direct claims, such as U.S. Treasuries, but there are a blizzard of indirect claims through uninsured deposits, mortgage and corporate debt and investment fund shares. Dollar liabilities have clearly ballooned in the past decade. The U.S. federal debt has increased four-fold in less than 10 years to some $36 trillion, while bank deposits have more than doubled to $18 trillion since 2008.
