by Hubert Marleau, Market Economist, Palos Management
DiscussionsĀ surrounding whether the dollar debasement is an immediate threat has so far been theoretical or anecdotalĀ with little empirical evidence that it isĀ theĀ case. Nonetheless, theĀ dollarĀ question has been the centerĀ of attention in the media.
Last week, the Chinese President Xi Jinping made it public that he wants the renminbi, Chinaās currency, to become āpowerfulā and ultimately replace the USD - the oneĀ most held by central banks in the form of US Treasuries. A few days later, China told its banks to cut back on buying USĀ Treasuries, citing concerns over concentration risks and market volatility, rhyming with a concern that the dollar is losing its status as the safest place in the world to part withĀ your money.
In my judgment, Xi may have hit a raw nerve, but theĀ statement has more to do with geopolitical manoeuvring and the current negative narrative about the greenback,Ā which has declined by about 12% since Trump returned to office as President,Ā than a loss of confidence. A number of countries, sovereign funds, financial institutions and retail investorsĀ have turned away from the dollar to commodity trading and to hedging strategies.
This wasĀ caused by the Ā implementation of tariffsĀ by Trump, includingĀ frequent threats,Ā US foreign policy isolation, straining international relations,Ā political polarization in America, causing domestic strife,Ā and the weaponization of the dollar, Ā at a time when the national debt,Ā exceedingĀ $38 trillion and 125% of N-GDP, with budget deficits worsening.
The situation begs 4 big questions
First, is it remotely realistic that China can replace the Dollar? Ā No.
The renminbi accounts for only 2% of global currency reservesĀ versus 57% for the USD. In order for the renminbi to become eligible as a main international asset, China would have to open its capital markets to the world, end limits on foreign investments, allow ChineseĀ to move money abroad, make its currency convertible easily into gold and other currenciesĀ andĀ above allĀ let it float freely. There is no indication that China is about to implement any of those pre-conditions to makeĀ its currency a safe and liquid alternative.
Second, is the US willing to lose its geopolitical advantage?
The U.S. government will not Ā allow its currency to fall out of favour: the ramifications would be massive. It would decrease its chances to stop or curtail Ā a currency crisis,Ā eliminate or reduce its geopolitical power,Ā remove its capability of enforcing sanctions,Ā increase the cost of capital,Ā hurt theĀ ability to finance the budget and trade deficits,Ā and lose its ability to block countries from trading and makeĀ international payments.
Third, will Americans readily accept a lower standard of living and of stability? No.
Four, is there any empirical evidence that the world is selling theĀ Treasuries? NoĀ
As a matter of fact, the U.S. is not even in a quietĀ quitting of Treasuries. The U.S. government has $36 trillion of debt on issueĀ and its bonds are the bedrock of the global financial system, of which 24% isĀ held by foreign investors. In November 2025, foreign holdings of U.S. Treasury securities reached a record high of $9.4 trillion, representing a 7.2% increase from a year ago. Only China, Brazil and India shed some.
The bottom line is that the world demandedĀ shortĀ term protection, which in turn, has subjected the USD to an extraordinarily huge amount of various sorts of hedging strategies, whichĀ tantamount to near-term shortĀ selling. They wereĀ not outright naked salesĀ because investors, commercial merchants, international borrowers, hedgers and financial traders cannot move away from it. Forex players rather use the swap markets, forwardsĀ and over-the-counter contracts, whichĀ according to the Bank of International Settlements (BIS)Ā amountsĀ toĀ $155 trillion, to hedge themselves against currency movements. It appears that recent Ā activity in the overĀ theĀ counter market has occurred during offĀ tradihours, suggesting that most of the hedging occurred in Asia.
Conclusion
Donāt panic,Ā insteadĀ itās better to stick with the exceptionalism of US productivity.Ā ItĀ underscores Ā its durability and will likely rescue the market from the pessimism surrounding the USD down the road;Ā Ā eventuallyĀ the weight of the fall should trigger the ādollar smileā theory developed by Stephen Jen, a former Morgan Stanley currency strategist and founder of Evrizon SLJ Capital. TheĀ thesis says that the US dollar tends to closely followĀ a defined cycle that is influenced by the relative performance of the economy and relative perception of risk. Moreover, Ā investors should take note that interest rate differentials across the entire yield curve between the US and the rest of the world significantly favor the U.S. Treasuries, directly offering plenty of risk Ā protection.
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