De-dollarization 2023 could change real estate forever
The U.S. Dollar has long enjoyed world dominance. Until recently, the dollar has been the choice currency of the global economy when it comes to trading, oil, real estate, and other international transactions. Yet the threat of de-dollarization lingers, and its impact on real estate looms near.
What is de-dollarization exactly?
De-dollarization is the reduced use of the greenback (the dollar bill) due to a decline in national, institutional, and financial demand. In order for the greenback to plummet to worthless in value, a complete currency collapse would have to occur. The only way that would be possible is if an adverse or catastrophic event occurred like World War I. Another possibility that would dethrone the U.S. dollar as the most stable and safe currency is the emergence of a more viable currency option.
“A candidate reserve currency must be perceived as safe and stable, and must provide a source of liquidity that’s sufficient to meet growing global demand,” J.P. Morgan strategic research analyst Alex Wise said.
The Federal Reserve has always benefitted from being the go-between for the world’s business dealings. As more developing countries emerged, the need for a central currency to encourage global trading became even more vital. Thanks to its widespread global utilization by banks and lack of competition from other flailing economies like Europe and Japan, the U.S. accounts for 90% of transactions on the foreign exchange market.
See: Could the U.S. dollar collapse?
What is the impact of de-dollarization on real estate?
The impact of de-dollarization could spell a potential loss in confidence by foreign investors in the U.S. dollar. High inflation rates and the fallout from the United States’ involvement in the Russia-Ukraine war have called into question the stability and credibility of the U.S. economy. That is a lot of economic value. In a currency system no longer backed by gold or any other precious metals, the strength of economic value is all that separates the U.S. as the dominant global power.
Sanctions resulting from war, inflation, banking crises, and a weakening U.S. economy have renewed interest in an alternate world currency independent of the U.S. Countries like China, Russia, Venezuela, Malaysia, and India currently lead this rallying cry of the de-dollarization movement, and have opted to create swap lines to trade and conduct business with their respective countries. For instance, J.P. Morgan reported that as of July 2023, Bolivia, Argentina, and Brazil began paying for their exports and imports with the Chinese renminbi. Twenty-three countries in 2023 alone have followed suit.
China opens talks with Malaysia regarding an Asian Monetary Fund to replace the dollar (Source: Bloomberg.com)
So, what does that mean for the real estate market?
See: Why real estate ranks #1 in best long term investments
In times of high inflation, assets like real estate fare well as long-term buy-and-hold investments. While U.S. currency experienced a dip in stability, the call for widespread de-dollarization has not significantly reduced reliance on the U.S. dollar to raise immediate concern. Alex Wise credits the U.S. competitive advantage to its longstanding business alliances and partnerships. Instead, he hints at currencies like the Chinese renminbi taking over some of the dollar’s functions among China’s trading partners and sovereign nations as a more plausible outcome.
Foreigners may want to invest less in the U.S. economy or hold dollars as a savings strategy. However, should the dollar continue on the path of gradual decline, allowances like large deficits in international trade and government spending could come to a screeching halt. Foreigners may want to invest less in the U.S. economy or hold dollars as a savings strategy. Despite these impending possibilities, the likelihood of the dollar bill losing its place as the global reserve currency supreme is slim.
As with investing in any currency or investment, there is risk. To better protect assets against loss, experts advise diversification across different currencies and investments in distinct industries.
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Sources: U.S. News, J.P.Morgan, Forbes