The U.S. Dollar, The Business Cycle And What It Means For U.S. Vs. International Equities

It's great to be king

The U.S. dollar (USD) plays a vital role in global finance. It functions as the world's reserve currency and is the currency of choice for international commerce. As Figure 1 highlights, nearly three-quarters of global non-bank lending debt is denominated in the USD.

Its primacy in global trade also necessitates foreign central banks to hold the USD as part of their foreign exchange (FX) reserves. In fact, 60% of global central banks' foreign exchange reserves are invested in the USD as Figure 2 shows. The Euro is a distant second at 20%. It’s noteworthy that despite China's economic ascent since 2000, the Renminbi's (RMB) share of global FX reserves is only 2%. While it's reasonable to expect the RMB and other high-growth nations' currencies to continue their advance, it seems clear that the USD's reserve currency status is secure for the foreseeable future.  

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Total credit by currency of denomination

Currency of foreign exchange reserves

Source Figure 1: Bank of International Settlements (BIS), Russell Investments, as of 3Q2020. Yen and Euro data were converted to USD based on the conversation rate as of 3Q2020. Source Figure 2: IMF, Russell Investments. Note 2020 as of 3Q2020.

The U.S. dollar and the business cycle

The USD's wide acceptance for international commerce makes it a highly sought-after currency, especially when economic conditions are deteriorating. For this reason, it's said the USD is a counter-cyclical currency, meaning it trends in the opposite direction of the business cycle: strengthening as the business cycle slows and weakening as the economic outlook improves. This inverse relationship is illustrated in Figure 3. A weaker USD corresponds with improving global growth, while a stronger USD suggests a slowdown in growth.

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Source: Refinitiv DataStream, Russell Investments. As of 4Q2021. GDP based on Oxford Economics data, estimated from Q1 2020. 

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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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