The new U.S. credit rating downgrade will trigger short-term volatility for the dollar – but more importantly, could speed-up the long-term decline of the U.S. and global reserve currency.

Global rating agency Fitch downgraded the U.S. government’s top credit rating Tuesday to AA+ from AAA. Fitch cited fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that puts at risk the government’s ability to pay its bills.

Many U.S. analysts are predicting that this surprise downgrade of the world’s largest economy’s credit rating will only trigger short term volatility for the dollar – and the U.S. and global reserve currency wobbled on the news, as should have been expected.

However, as this is the second major rating agency (after Standard & Poor’s) to strip the U.S. of its triple-A rating, there are serious, legitimate questions to be asked about the long-term trajectory of the dollar.

No one can predict the future, but history unequivocally teaches us that nothing lasts forever. Global reserve currencies have come and gone before. It will happen again.

Indeed, I believe that we are witnessing in real-time the world beginning to shift away from a dollar-dominated financial system.

Among other reasons, this is because astronomic levels of debt, and the enormous amount of desperate money printing to monetise these debts, have caused the considerable drop in the long-term value of the currency.”

Earlier this year, I was one of the first voices to flag the threat to the U.S. dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trades.

At the time I highlighted that one of the most significant, but under-reported, outcomes of a three-day summit between Russia’s Vladimir Putin and China’ss Xi Jinping was that Putin said Russia is now in favour of using the Chinese yuan for oil settlements.

Separately, two deals, announced a week earlier, will see Saudi Arabia's Aramco supplying two Chinese companies with a combined 690,000 barrels a day of crude oil, bolstering its rank as China's top provider of the commodity. It was reported that Saudi Arabia was also in talks with Beijing to settle with the yuan instead of the dollar.

It appears U.S. rivals, led by China, are forming a new major economic bloc. If Saudi Arabia – home to massive oil reserves, which are estimated to be the largest in the world – does move to the yuan, that would lead to an enormous shift in the global economic system.

Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in U.S. dollars. This has given the U.S. dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire U.S. dollars in order to do so.

If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for U.S. dollars, which would lead to a decrease in the value of the US currency.”

This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets.

While the latest report from Fitch will have a minimal impact, two major credit downgrades, industrial-scale money printing to monetise astronomic debts, and rivals like China and their allies looking to take the financial crown from the US, can be expected to speed-up the long-term decline of the dollar.
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London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.