The Dollar Is Not King, Says Macquarie's Wizman

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00:00President Trump saying he's prepared to punish countries that challenge the reserve currency status of the U.S. dollar.

00:07If we lost the world standard dollar, that would be like losing a war, a major world war.

00:15We would not be the same country any longer.

00:18You ever hear the expression dollar is king? The dollar is king. We're going to keep it that way.

00:23Joining us now to discuss Terry Wiseman of Macquarie. Terry, good morning.

00:26Good morning, John.

00:27Is the dollar still king?

00:28No, the dollar is not still king.

00:30There's plenty of indications out there that there is de-dollarization taking place.

00:34It's happening slowly, and I think that's why maybe some traders don't pay too much attention to it

00:38or try to be in denial, effectively, if it's not staring you in the face and it's a slow drip.

00:43Why talk about it? But the slow drip continues.

00:46The reserve allocators are allocating less of their balances to the dollar.

00:50We're seeing banks in China, for example, that lend money to some of their emerging market clients,

00:57asking them to borrow in renminbi and not in dollars.

01:00The Federal Reserve did a study about this.

01:02We are seeing clearly a movement away from the dollar by private investors and semi-official investors,

01:09including pension funds, right?

01:10They want to effectively diversify.

01:12I think these are all aspects of a de-dollarization that's taking place slowly.

01:16I think the ideology of this, the origin of this, is the view that, first of all, the U.S. is disengaging from the rest of the world,

01:23and the Bretton Woods 2 arrangement, implicit as it may be, it no longer applies as strongly as it did prior to this administration.

01:31And, of course, there's plenty of policy uncertainty.

01:35The idea that the U.S. is exceptional because we have something called ordered liberty, I think, is breaking down.

01:42We may have managed chaos, but we certainly don't have ordered liberty anymore,

01:46and I think that's an aspect of the de-dollarization story as well,

01:49or at least the willingness on the part of many investors to look at the dollar differently and in a different light.

01:53I think you just spoke about the U.S. dollar for the best part of two or three minutes and didn't mention rates once.

01:57How divorced is this story from rate differentials?

02:00It's never going to be completely separated from rate differentials,

02:04but I suspect that you have to separate the cyclical aspect of wanting to hold a dollar

02:09and the rate-based reasons for wanting to hold a dollar from the structural story.

02:14And it may be the case that if the Fed, and it may not matter, of course, because the Fed may be cutting rates,

02:20in which case it would give a kick to the de-dollarization story, to the lack of willingness to hold dollars.

02:24So we may get an amplification from the rate story in the next few months of the willingness,

02:30on the part of investors, to de-dollarize or move away from the dollar.

02:34But if the Fed were raising rates, yeah, to some extent it would be important in preserving the value of the dollar,

02:39but it's not going to stand in the way of that structural long-term trend.

02:42Not to get too textualist, but what does de-dollarization mean?

02:46Does it mean not transacting in dollars?

02:48Does it mean hedging dollar risk, which is what a lot of people say is actually happening?

02:52Yeah, it's more than one thing.

02:54In fact, I'd say it's maybe up to five things.

02:57When you look at what the Bank for International Settlements does,

02:59when they look at the use of the dollar, they look at it against, you know, on five dimensions.

03:04They look at how much financing is taking place in dollars around the world by international borrowers,

03:10cross-border borrowers.

03:10They look at how much of international trade is denominated in dollars, is invoiced in dollars.

03:15They look at reserve managers, how much are they holding in dollars as a percentage of their reserves.

03:20And there's probably about two or three other qualifications or dimensions by which they look at that.

03:26Most of them have, again, been doing this slow drip for the last few years, right?

03:30There's been a somewhat slow decline.

03:33And I suspect that we're going to have other central banks around the world

03:37actually want to have more prominent use of their currencies.

03:43So this might amplify the story too, right?

03:45We have Christine Lagarde at the ECB saying that she wants to give more prominence to the euro

03:49in international transactions, in global trade.

03:52And she sees her window of opportunity just at a time when the U.S. is disengaging.

03:57So you might have not just a push from this administration,

04:01but you may have a pull from other central banks.

04:04And I think what the BRICS are saying is part of that pull as well.

04:06Is this story overplayed, given the fact that the euro region isn't exactly a bastion of political calmness

04:13or sort of fiscal order right now?

04:15Yeah, so it depends on this whole story of European integration, I suppose, right?

04:19If Europe can start to begin to look a little bit more like the U.S. did, say, a few years ago,

04:25where they are issuing bonds jointly, where they are promulgating regulation jointly

04:30and uniformly and coherently, where they adopt a common foreign policy.

04:34I mean, all of the things that might make the European Union look more like what we idealize the U.S. to be

04:40will help, I believe, the internationalization of the euro.

04:43What will reverse this trend?

04:45Well, I mean, let's go back to the origins of the problem, right?

04:49If you believe that policy uncertainty emitting from the U.S. is one of the reasons,

04:54well, we have to have a reversal of policy uncertainty.

04:56We have to move away from managed chaos and maybe back to order of liberty.

04:59You actually need to see real trade deals.

05:01Well, I don't think so, actually.

05:03I think if all of this tariff situation were to go away, and I don't think it will

05:09because we're going to see another round of strategic tariffs,

05:11there's other reasons why there's policy uncertainty emanating from the U.S., right?

05:15Are we going to get our fiscal house in order, for one thing?

05:18Are we going to see the kind of fiscal tension, social tensions, rather,

05:21that we have seen in the last few years?

05:23I mean, I think all these things play a role into how foreign investors perceive the U.S.

05:27So, anyway...

05:27That's right.

05:28We're going to see them now...

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