US dollar (USD) dominance continues to decline as wealthy investors and country leaders take steps to reduce their exposure to the currency. What are the potential consequences of such trends?
As the global economy struggles to get back on its feet after the COVID-19 pandemic, wealthy investors and nations are betting billions against US stocks amid growing recession fears. The move is a sign of the rising uncertainty about the future of the US economy, which has been hit hard by the pandemic.
One of the reasons for this trend is the view that the US stock market is overvalued and due for a correction. With stock prices at all-time highs, many investors and nations worry that a bubble is waiting to burst. As a result, they are looking to hedge their bets and protect their assets by shorting US stocks. Instead, using other safe havens to increase profitability.
Betting Against US Equity
Shorting is a common investment strategy that involves betting against a given asset. When investors short a stock, they borrow shares from someone who owns them and sell them at the current market price. They then hope to buy back the shares at a lower price in the future, return them to the original owner, and pocket the difference as a profit.
Short interest in the US stock market has increased in a few years. This indicates that many investors and nations are betting against the US stock market. In fact, short sellers won big last year as the broader market declined. Tallying $300 billion in mark-to-market profits on the average short interest of $973 billion.
Meanwhile, the broader banking sector contagion also played a part, as investors reduced exposure. According to March 2023 data from S3 Partner, short-selling banking stocks returned a 17.20% profit on an average short interest of $82.40 billion. Needless to say, US banking trends played a part here.
Countries Reducing USD Dominance
One of the nations that has been betting against US stocks is China. According to data from the US Treasury Department, China has been reducing its holdings of US Treasury bonds and buying more gold. This indicates China wants to diversify its holdings and reduce its exposure to American assets.
Another nation that has been betting against US stocks is Japan. In 2020, the Japanese government’s Pension Investment Fund, the world’s largest pension fund, reduced its holdings of US stocks from 25% to 21%. This was to reduce the fund’s risk and increase its returns.
Other countries, specifically in the Middle East, are leading the charge in 2023 to facilitate trade without US dollar interference. Also, five major emerging economies, Brazil, Russia, India, China, and South Africa, collectively known as BRICS, have taken such steps.
In a May 10 Bloomberg report, South Africa’s foreign minister asserted that the group would examine whether a new global currency would effectively allow them to disconnect from the US dollar. This can impact global USD dominance, putting the national currency in a “precarious position,” Kentucky Senator Rand Paul argues.
In his recent Fox interview, Paul says the government’s foreign and fiscal policies pushed BRICS and other nations to gang up on the American dollar.
Deep Pocket Investors Follow
Wealthy investors are also getting in on the action. For example, billionaire investor Carl Icahn recently revealed a significant short position in the US stock market. Icahn believes that the market is overvalued and due for a correction, and he has positioned himself to profit from any downturn.
More recently, United Arab Emirates Royal Group allegedly built a short position worth billions of dollars in US stocks. Here, the group shifted its portfolio into short-term US Treasuries and invested more in commodities and crypto. The Abu Dhabi Royal Group is a conglomerate of firms owned by the ruling family of Abu Dhabi, one of the seven emirates that make up the UAE.
Firms that the Abu Dhabi Royal Group owns include the Abu Dhabi Commercial Bank, the Abu Dhabi National Energy Company (TAQA), Emirates Palace Hotel, and the media company Sky News Arabia. The group also owns the Abu Dhabi United Group, which oversees the Manchester City Football Club operations in the English Premier League.
The Abu Dhabi Royal Group is among the most prominent and influential business entities in the UAE and the wider Middle East. Its vast resources and financial clout have enabled it to pursue ambitious projects and investments locally and internationally.
The growing trend of betting against US stocks is a sign of the rising worries about the future of the American economy. While the economy has shown signs of improvement in recent months, many challenges are ahead.
Dark Clouds
Inflation is a concern because it can lower the buying power of consumers and businesses. When prices rise, people and companies spend more money to buy the same goods and services, leading to lower economic growth and reduced company profitability.
Inflation can also lead to higher interest rates, making it more expensive for businesses to borrow money.
The Federal Reserve has indicated that it is prepared to tolerate higher inflation in the short term to support economic growth. However, if inflation continues to rise, the Fed may have to take action to control it. This could lead to higher interest rates and slow economic growth, harming the US stock market.
Overall, the growing trend of betting against US stocks is a sign of the rising uncertainty about the future of the US economy. As a result, investors and nations are hedging their bets and protecting their assets by shorting US stocks.
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