De-dollarization! No more dollars! The USD lost its reserve status!  

This recent saga began, when BRIC nations announced its ambition to trade with its own “BRIC” currency in an attempt to chip away at the U.S. economic dominance and to ditch the U.S. Dollar (USD) as the intermediary. Why does this matter?

Imagine this scenario:  

Canada and Venezuela decide to trade in their own respective currencies. The current exchange rate is 1 CAD = 1,800,000 VEF. By the time, a Canadian merchant exchanges his or her VEF millions to CAD, the exchange rate now increased 100x where 1 CAD = 180,000,000 VEF. The Canadian merchant inherently lost value of the currency that he was holding, or in other words, VEF became so much less valuable compared to the CAD that the merchant will receive 100x less CAD.

This is called foreign exchange risk and to minimize exposure the international community agreed to recognize one currency as the reserve currency to facilitate and stabilize global trade.   

History of How USD Became the Reserve Currency

In the mid-1920s, the process of transitioning the reserve currency from the British Pound to the U.S. Dollar began. At the time, many of the developed countries had their currencies pegged to gold to stabilize currency exchanges, and the U.S. held the most gold reserves. The process was finalized at the Bretton-Woods meeting twenty years later in 1944. Since then, the USD continues to hold onto its reserve status with nearly 60-65% of all global trades in 2021 being settled in dollars.

$1 does equal not $1

We understand the purpose for a reserve currency, but how can $1 be valued any more or less than $1?

USD value is commonly measured with these three methods:   

• The strength of the USD compared to a basket of other currencies is reflected on the dollar index chart, or DXY. If the DXY is rising, it means that the U.S. dollar is strengthening relative to other currencies, while a falling DXY suggests that the U.S. dollar is weakening.
  • At the time of writing, the USD is valued at $102.20, closer to its 52-week low of $99.57
  • During the Global Financial Crisis in 2008, the DXY reached a low of $71.30

• Demand for U.S. 10-year treasury notes. This investment is considered one of the safest because this is lending to the U.S. Government with an interest rate and then recouping the principal at the end of the term. As the interest rate rises, the yield on the note is more attractive to foreign investors who would then need to exchange their current currency to USD to buy the note, which increases USD demand.
  • Currently at 3.39%, just around the mid-point of its 52-week range

• Foreign currency reserves, or the amount of dollars held by foreign countries on their balance sheets.
  • This is where the main concern lies in the recent headlines. According to CNBC, we are now at the lowest level in 25 years

Current Breaking News

The current news we are hearing is based on the presumption that countries with USD on their balance sheet will try to offload their dollars and replace it with the new BRIC currency, because of the numerous trade agreements excluding USD. Additionally, the U.S. Federal Reserve keeps on printing, increasing the chance of “hyperinflation”. So instead of holding onto these “worthless” dollars, foreign dollar owners prefer to trade the USD with assets that would hold or increase in value such as U.S. real estate.

Real Estate Impact

If we take a hypothetical scenario where all the BRIC nations offload 100% of their dollars, there will still be some global demand for USD, and this would cause the value of the dollar to skyrocket leading to a significant increase in property values.

Along with this fear of having devalued dollars combined with high inflation, officially reported at 6%, U.S. property values may experience an uptick in the short term. However, with yield curves still predicting a recession, inflation at an unsustainable level even after nine interest rate hikes since March 2022, and nowhere near the Treasury’s official goal for inflation of 2%; it is not farfetched to expect more interest rate hikes adding downward pressure on real estate by the end of the year.

Whether you are considering buying, selling, or renting, consider these factors in your decision. Don’t try to time the market but come to an educated conclusion based on personal situations, local market analysis, and macro-economic factors.