Predictions of the demise of the dollar have proven far-fetched, writes Chris Smith, general manager of CMC Markets New Zealand.

It’s understandable that people have been whispering about the demise of the US dollar in recent months.

The last time the US dollar performed this poorly, the infamous Richard Nixon was in charge of the world’s largest economy.

The United States’ involvement in the Vietnam War had cast a long shadow over the country, and the economy was running at a significant deficit – which led many investors to exchange their dollars for gold.

It was in this context that Nixon made the unilateral decision to end the US dollar’s convertibility to gold at a fixed rate – ending a system that had been in place since the end of World War II.

When you look at the level of change, uncertainty and chaos during that period, it’s sobering to think that the US dollar has this year had its worst start since 1973.

That has been offset to some degree by July, which has been the best month for the currency since US President Donald Trump took office in January (attributable to higher rates and faster-than-expected GDP growth).

Despite the recent uptick, the US Dollar Index is still down more than 7.5 per cent in the year to date, weighed down heavily by Trump’s ongoing dalliance in trade wars, lingering inflation and growing concerns over government debt.

In contrast to this, the euro, New Zealand dollar, pound sterling and Australian dollar are all up more than 5 per cent against the US dollar.

The repercussions here go beyond the performance of the greenback. This is also about the place the United States holds in the geopolitical landscape as the centre of the global financial system, a position consolidated by the relative stability and widespread use of the dollar.

But things are more complex at the current moment. US debt as a portion of GDP is the highest it’s been since World War II and there are growing concerns about the country’s fiscal outlook amid the current decision-making processes out of Washington.

You need only look at the enormous backlash to Trump’s “one big, beautiful bill”, estimated to add US$3.4 trillion to the US national debt, to understand the level of concern about the current direction of the United States. Add to this the complexity of Trump’s international engagements, which have included starting tariff wars and pulling funding from the defence efforts of allies, and you can see a clear erosion of trust.

So, is this a turning point? Is this the moment the US dollar sees its dominance start a trend of continued decline?

Those questions do seem valid in the current context, but even if enough countries around the world wanted to end the dominance of the greenback, the practicality of doing so would be near impossible.

The world can’t simply go cold turkey on the US dollar.

The US currency still accounts for 90 per cent of the foreign exchange market, 66 per cent of international debt, 48 per cent of SWIFT transactions and half of all international trade transactions. Put into numbers, a global average of US$6.6 trillion is traded on average every day.

Shifting those statistics even slightly will demand massive cultural, logistical and behavioural changes across countries, businesses and individuals around the world. This just doesn’t seem plausible at a time when most people want less chaos, not more.

We also have the precedent of having been here before, in 1973. After a period of political uncertainty and stagflation through the 1970s, the dollar staged a remarkable comeback, buoyed by strong economic growth through the 1980s. The uptick we’ve seen during the month of July this year is a strong reminder that good economic performance can quickly turn the fortunes of the US dollar around.

As the cliché goes, markets are like the New Zealand landscape: they sometimes go up and they sometimes go down. There is every possibility the US dollar continues to bounce back and recoup the losses from the beginning of the year. It’s also worth remembering that the dollar initially spiked upon the election of Trump before declining in response to his decisions.

One important thing to note here is that none of this is necessarily bad for US business. Globalised businesses, like Apple and Microsoft, don’t mind a weaker dollar given the huge income they make in other currencies. For them it’s a case
of losing a little in one pot, while gaining in another.

This is to say that there’s little incentive for even large corporations to agitate for changes that could challenge the international dominance of the dollar. The more likely scenario is that the US – and all the countries using the greenback – will just ride out this unsettled period as they did in the 1970s