Sanctions, Trade, Commodities, and Emerging Markets: Who Benefits/Loses from a Weaker Greenback and What Are the Geopolitical Ramifications?

One of the topics discussed during our recent risk governance meeting was the current state of the US dollar and the geopolitical risks that are influencing its performance. We discussed how investors and businesses can safeguard their US dollar holdings in response to these risks.

The weakening of the greenback has been attributed to various factors, including investor uncertainty stemming from the recent tariffs imposed by the US and potential new tariff threats. Additionally, the administration’s preference for lower interest rates has contributed to the dollar’s decline.

While the near-term outlook for the dollar remains pessimistic, a V-shaped recovery is anticipated in the second half of the year. This recovery is expected to be driven by the outperformance of the US economy, particularly relative to the Eurozone, and heightened inflation expectations and data, which reflect the impact of the tariffs.

Geopolitical risks associated with a weaker greenback include a diminished ability of the US to influence international trade and policy, potentially allowing strategic rivals to fill the power vacuum. Furthermore, the US heavily relies on dollar-based financial sanctions as a foreign policy tool. As other countries seek alternative currencies and payment systems to avoid exposure to a volatile dollar, the effectiveness of these sanctions is diminished.

Rising import costs and inflation could strain US consumers, potentially leading to domestic economic and political instability that diverts attention from foreign policy priorities. Lastly, a loss of confidence in US assets would compel the government to offer higher interest rates to attract foreign capital, escalating debt servicing costs and potentially necessitating difficult spending decisions between military budgets and domestic programs.

However, what risks does a weaker greenback pose to other countries? A transition away from a single dominant reserve currency towards a multipolar monetary system exacerbates financial volatility and the risk of international financial fragmentation into regional blocs. Countries that heavily rely on exporting to the United States, such as China, Japan, and Germany, would face a decline in US demand for their goods. This could result in substantial income losses, increased unemployment, and potential recessions in those nations. Furthermore, the volatile nature of the dollar exerts pressure on other central banks to adjust their interest rates or intervene in currency markets to safeguard their competitiveness, thereby increasing the likelihood of retaliatory trade measures and “currency wars.”

There has been substantial debate regarding the eventual loss of the USD’s global dominance as the world’s reserve currency, and such concerns are currently premature (note: The dollar’s share of global foreign exchange reserves has gradually declined from 71% in 1999 to approximately 58% today.). Nevertheless, there is an emerging trend towards funding international commerce in alternative currencies. Countries such as Russia, China, and Brazil are increasingly settling trade in local currencies or currencies like the Chinese yuan in key sectors, particularly energy and commodities. In fact, in the latter sectors, Russia and China can no longer rely on the dollar for oil and gas sales. Buyers like China and India are capitalizing on this by settling purchases in local currencies to obtain discounts and avoid sanctions exposure.

Who benefits from a weaker greenback? US multinational companies benefit from a weaker greenback. US-made products are cheaper on international markets, and foreign currency earnings (e.g., Euros, Yen) are converted back into USD, increasing their value and boosting reported profits.

Many developing nations hold debt denominated in USD. A weaker dollar makes it cheaper for them to service and repay this debt in their local currencies. A less attractive dollar encourages international investors to seek higher yields and growth opportunities in emerging market stocks and bonds. Commodity producers and commodities generally perform well when the USD falters.

Clients should refer to our debt servicing tables and ranking against our currency tables and external liabilities for some unique insights. A strategic allocation toward international equities, with a focus on diversified emerging markets, is a key play for navigating a weakening US dollar.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.