The U.S. dollar has been the world’s dominant reserve currency for decades, allowing the U.S. to borrow cheaply. However, with the rise of alternatives like the euro and yuan, there are concerns the dollar may lose its privileged status. This could lead to higher U.S. borrowing costs and impact markets. Investors worried about the dollar losing reserve currency status should diversify globally both across asset classes and geographically. Reducing reliance on dollar-denominated assets and adding hard assets like gold can hedge currency risk. Emerging markets with strong fundamentals like China may benefit if the dollar declines. Crypto could also play a role as an alternative decentralized currency. Overall, a balanced portfolio limiting dollar exposure can help investors if the greenback is no longer the global reserve currency.
Diversify into international stocks and bonds
As the global reserve currency, the U.S. dollar currently makes up over 60% of global foreign exchange reserves. However, its share has slowly declined over the years. If this trend continues and the dollar loses its privileged status, the values of dollar-denominated assets like U.S. stocks and bonds could fall as demand declines. Investors worried about this outcome should consider diversifying into international securities that are less tied to the dollar’s fortunes. Allocating a significant portion of your portfolio to foreign stocks and bonds can reduce reliance on U.S. assets. Focus on economies with strong fundamentals like China and emerging Asia that may benefit from a dollar decline. Europe, Japan, and commodity-based economies like Australia and Canada also provide currency diversification.
Add hard assets like gold that hold value across currencies
Hard assets like precious metals can retain their value even if the dollar declines significantly. Gold in particular is considered a hedge against currency devaluation and inflation. With central banks ramping up money printing, gold’s status as a scarce and finite resource could make it quite attractive if fiat currencies like the dollar lose purchasing power. Gold bullion, gold mining stocks, and gold ETFs can offer exposure. Other precious metals like silver and platinum also have similar properties. Hard assets like real estate can also hold value across currencies, though more localized economic conditions play a bigger role in housing prices.
Consider cryptocurrency as an alternative decentralized currency
Cryptocurrencies like Bitcoin and Ether were created in part as decentralized alternatives to fiat currencies like the U.S. dollar. If the dollar loses reserve status, crypto may gain appeal as an alternative international currency with no central authority. Cryptocurrencies are global in nature and allow rapid cross-border transactions. Of course, crypto is still very speculative and volatile. But a small allocation as part of a diversified portfolio can be worth considering. Stablecoins like USDC that peg their value to the dollar can reduce volatility. Government-backed digital currencies are also on the horizon and could complement existing cryptocurrencies.
Maintain a balanced portfolio with limited dollar exposure
More broadly, holding a balanced portfolio with global diversification, hard assets, and alternative currencies can help mitigate risks if the dollar declines. Don’t overweight any single currency. Have a plan in place to reduce dollar allocations if necessary by selling U.S. assets and reallocating to foreign stocks, bonds, gold, crypto, etc. Pay attention to economic indicators like falling foreign demand for Treasuries that may signal waning dollar dominance. With prudent planning, a dollar crisis doesn’t have to be catastrophic for your investments.
If the U.S. dollar loses its status as the dominant global reserve currency, investors should take steps to diversify their portfolio across currencies, asset classes, and geographies. Hard assets like gold and diversified international stocks and bonds can retain value amid a dollar decline. Cryptocurrencies may also play a bigger role. Maintaining a balanced portfolio with limited dollar exposure can help hedge risks and take advantage of potential opportunities if the dollar is no longer king.