Dedollarization and the DBC ETF (NYSEARCA:DBC) Product

Since 1450, there have been six reserve coins. Portugal dominated the currency world from 1450 to 1530, when Spain took over from 1530 to 1640. From 1640 to 1720, the Netherlands controlled the world’s most important currency before France took over the leading role until 1815. Britain led world financial markets until around 1920, when the United States and the dollar rose to the top spot. Each dominant period lasted around a century, with the dollar’s current term eclipsing its 100th anniversary.

Apart from the passage of time, recent events have made the future of the dollar’s dominance in doubt. A 2022 handshake between Chinese and Russian leaders and geopolitical events threaten the dollar’s leadership role. De-dollarization will have significant ramifications for global assets. Goods cross borders as they feed, energize and shelter people around the world. A change in international finance system that alters the position of the US currency could cause dollar-based commodity prices to rise, perhaps dramatically.

The dollar index is not objective and is a mirage

Many market participants follow the dollar index for clues about the value of the US currency. The index measures the US dollar against other world reserve currency instruments.

The chart highlights the dollar index’s 57.6% exposure to the world’s second reserve currency, the euro. The composition of the index included exposure to the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc, all fiat currencies. The value of a fiat currency depends on the full faith and credit of the countries issuing the fiat currency and has no support other than economic and political stability.

In today’s world, the index reflects the value of the dollar against the currency instruments of other allied countries. Interest rate differentials are the most significant factor in the value of one of these currencies relative to the others. Since the US central bank is the leading institution, many other allied central banks follow the Fed’s monetary policy lead.

The bifurcation of the world’s nuclear powers is why the dollar index has become a mirage. The February 2022 handshake between Chinese President Xi and Russian leader Vladimir Putin on a “without limits” The alliance was a decisive event. Russian troops invaded Ukraine less than a month after the fateful agreement, leading to a series of US and NATO sanctions against Russia. Meanwhile, China continued with plans for reunification with Taiwan. To avoid sanctions, China, Russia and allies have made moves to avoid using the US dollar and euro to settle cross-border transactions. China is the world’s second largest economy and Russia is a major commodity producing nation. Geopolitical change has caused the dollar’s role as the global reserve currency to diminish.

The de-dollarization trend reflects the geopolitical landscape

Along with allies, de-dollarization began to take hold, with the Saudis selling oil to China in yuan and India in rupees. Earlier this year, Saudi Arabia abandoned a fifty-year petrodollar agreement that priced oil in US dollars.

China and Russia have reduced their holdings of US dollars and government bonds, increased their gold holdings and led an effort to create a BRICS currency with some gold backing to challenge the dollar’s dominant role. Governments have increased their gold purchases in recent years, with China and Russia taking the lead. Additionally, as the world’s top gold producers, China and Russia will likely siphon domestic gold production to increase reserves. Because strategic stockpiles of the commodity are a national security concern in China and Russia, their reserves are likely higher than current estimates.

The graph highlights that China and Russia produced 22.7% of the world’s gold mine production in 2023. The thirst for gold, the world’s oldest currency and medium of exchange, is a commentary on the role of the US dollar in the world financial system and in its financial system. position as reserve asset. The handshake that created the China-Russia alliance ushered in the era of de-dollarization.

Commodity Pricing Mechanism – De-dollarization has significant ramifications for commodity prices

The dollar’s role as the world’s reserve currency has made the US currency the benchmark for pricing most commodities. The London Metal Exchange is the world’s leading trading arena for non-ferrous metals. Meanwhile, in the UK, LME metals contracts, including copper, aluminium, nickel, lead, zinc and tin, use the US dollar as their pricing currency. In addition, the London bullion market is the main trading venue for gold and silver. Gold and silver prices in London use US currency for pricing. Metals are not the only commodities traded in dollars. Agricultural products and energy commodities also use the US currency as their main price indicator.

The lower dollar on the global stage is supporting higher commodity prices

As a reserve currency, governments, central banks and monetary authorities held US dollars as a critical currency for cross-border transactions. De-dollarization that reduces dollar holdings will lead to trading and bartering for other currencies and assets. The decline in the dollar’s position is bullish for commodities as it erodes full confidence and credit in the US currency, leading to inflationary pressures that push commodity prices higher. Therefore, even if the dollar index rises in the coming months and years, it is only relative to the dollar against the other reserve currencies in the index basket. The increase in global transactions in various currencies means that the value of the dollar could decline even as the dollar index strengthens.

DBC is a diversified commodity ETF with exposure to energy, agriculture and metals

The significant shift in the geopolitical landscape leading to de-dollarization and competition from a potential BRICS currency with gold could increase inflationary pressures, eroding the purchasing power of the US dollar and pushing commodity prices higher. Fund Profile for Invesco DB Commodity Index Tracking Fund (NYSEARCA:DBC) states:

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DBA invests over half of its assets in energy commodities. DBA has additional exposure to precious and base metals and agricultural commodities. At $22.41 per share, DBC had $1.50 billion in assets under management. DBC trades an average of over 995,000 shares daily and charges a management fee of 0.85%. The ETF paid an annual dividend of $1.09, yielding 4.86%.

The five-year chart shows the strong 194.3% gain from the pandemic-inspired 2020 low of $10.41 to the 2022 high of $30.64 per share. DBA corrected from its high of 2022, and while the current trend is slightly bearish, the ETF has strengthened from $21.51 to $24.09 per share in 2024.

De-dollarization could dramatically change commodity markets in the coming years, pushing prices considerably higher. DBC invests in a diversified portfolio of commodity assets that power and fuel the world. As the dollar loses its dominant position, commodity prices are likely to rise, and the Invesco DB Commodity Index Tracking Fund ETF should appreciate.