The Almighty Dollar?
By Randall T. Coleman, CFA, Portfolio Manager
Key Takeaways
- Currency swings can erase local gains – Examples from Turkey and Argentina show how equity market gains in local terms can vanish once translated into US dollars due to severe currency depreciation
- Dollar dominance is shifting but intact – While the US dollar still accounts for ~40–54% of global trade invoicing, its share of global foreign exchange reserves has steadily declined from ~70% in 2000 to ~58% in 2024 and ~57.7% in early 2025
- Potential accelerants to de-dollarization – Global trade wars, sanctions, and financial weaponization could push more countries to diversify away from the dollar, though the process remains slow compared to consumer behavior shifts (e.g., lab-grown diamonds displacing mined stones).
Domestic investors have it easy: pick the stocks that go up and your portfolio goes up. International investors complicate the matter. For them, portfolio returns are shaped not only by the performance of underlying equities abroad but also by foreign exchange fluctuations. When the US dollar depreciates, foreign-currency gains translate back into more dollars, serving as an extra tailwind. This year, the weakening dollar has enhanced US investors’ returns on international equities—essentially magnifying both gains and volatility depending on FX direction.
While the dollar has experienced cycles of strength and weakness, other currencies have suffered outright collapse, becoming cautionary tales of macroeconomic mismanagement. The Turkish lira and the Argentine peso stand out as “one-way disasters” with devastating impacts on both local and dollar-based returns.
- Turkish lira: Between May 2023 and March 2024, the lira depreciated from around 18 to 32 per US dollar—an effective loss of nearly 44% in value. Back in mid-2018, the lira lost about 35% of its value in just 47 days (July 1 to August 16). A local investor could see nominal equity gains in lira-terms, but in USD terms, those gains often disappeared entirely due to FX collapse.
- Argentine peso: The peso has endured chronic devaluation, inflation, and economic instability over decades. In April 2025, the peso slid about 10% in a single day to near AR$1,200 per dollar after easing capital controls under an IMF agreement. Over the long term, many Argentines have turned to the US dollar to preserve wealth. While a local investor might report 100% gains in peso during hyperinflation, converting back to dollars often wipes out those gains entirely.
These examples illuminate a brutal truth: in unstable monetary systems, currency depreciation can dominate equity returns and render local gains meaningless when measured in USD. The graph below shows the +1479.78% 10-year gain in the Istanbul XU100 Index in local currency terms versus the index’s return in US-dollar terms. The gain over 10 years shrinks to +4.39%, or 0.43% annualized.
Source: Bloomberg
A compelling parallel comes from beyond finance. Alexander Lacik, CEO of Pandora (the accessible global jewelry chain), noted in a Bloomberg TV interview Friday that lab-grown diamonds now represent the majority of all loose stones sold in the United States. Consumers increasingly choose these synthetic alternatives—which offer identical quality at lower prices—demonstrating that “when given the option, consumers vote with their wallets.” He expects this shift to be permanent.
This case is instructive: it shows how entrenched consumer habits—in this case, favoring mined diamonds—can change rapidly once alternatives achieve scale, affordability, and legitimacy.
This raises a provocative question: could the dollar face a similar erosion in global preference? Like diamonds, the dollar has long benefited from an aura of trust, liquidity, and dominance. However, several developments suggest early signs of experimentation:
- Demand for the Chinese renminbi in some trade invoicing, particularly in Argentina, surged from zero to nearly 50% for imports from China following expanded currency-swap agreements.
- India’s refiners have increasingly been paying for Russian crude in UAE dirhams—seeking to bypass dollar-based channels—reflecting strategic diversification.
Yet such shifts remain niche. Consumer choices change rapidly; monetary systems are deeply networked and institutional. While the analogy to diamonds is thought-provoking, replacing the dollar is a far slower process—if it happens at all.
To assess the dollar’s trajectory, it’s important to distinguish transaction demand from reserve demand:
- Transaction demand: The dollar remains the dominant currency for invoicing global trade. According to the European Central Bank, about 40% of global exports are invoiced in US dollars—far exceeding the US’s share of exports—and this share has remained stable through 2023. Other estimates place dollar usage in trade invoicing at around 50-54%.
- Reserve demand: The share of global foreign exchange reserves held in US dollars has gradually declined. At the end of 2024, the figure stood at roughly 58%, down from about 65% a decade earlier and 70% in 2000. In Q1 2025, IMF data showed a further dip to approximately 57.7%.
While still dominant, the steady decline in reserve share signals that central banks are diversifying away from overreliance on the US dollar.
An unintended—and potentially accelerating—force in this dynamic could be a global trade war. If the United States and its trading partners escalate tariffs, sanctions, or weaponize dollar-based financial systems, other nations may intensify efforts to reduce reliance on the dollar—as both a medium of transaction and a reserve asset. Reduced transaction usage and reserve diversification could feed into each other, accelerating de-dollarization trends that are now only incremental.
The US dollar remains the linchpin of the global financial system—but its dominance is no longer immune to challenge. Only time will tell whether the US dollar will follow the fate of mined diamonds—displaced by practical and credible alternatives—or retain its supremacy. For now, its global role remains intact but is visibly evolving.
The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.