The global dominance of the USD is on the decline following the economic turmoil in the United States. The economically aligned nations known as the BRICS will consider whether a new global currency would allow them to decouple from the US dollar. Wealthy investors have created billions of dollars worth of short positions in US stocks.
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 recover from the COVID-19 pandemic, investors and wealthy nations are betting billions against US stocks amid mounting recession fears. The move is a sign of growing uncertainty about the future of the US economy, which has been hit hard by the pandemic.
One reason for this trend is the view that the US stock market is overvalued and needs to be corrected. With stock prices at all-time highs, many investors and nations fear that a bubble is about to burst. As a result, they seek to hedge their bets and protect their assets by shorting US stocks. Instead, use other safe havens to increase profitability.
Bets Against US Equities
Short selling is a common investment strategy that involves betting against a certain asset. When investors short stocks, they borrow shares from someone who owns them and sell them at the current market price. They then hope to buy the shares back at a lower price in the future, return them to the original owner, and pocket the difference as a profit.
Short-term interest in the US stock market has increased in just a few years. This indicates that many investors and nations are betting against the US stock market. In fact, short sellers gained a lot last year when the broader market declined. Count $300 billion in market gains on the average short interest of $973 billion.
Meanwhile, contagion from the broader banking sector also played a role, as investors reduced exposure. According to S3 Partner’s March 2023 data, short-selling bank stocks returned a gain of 17.20% with an average short interest of $82.40 billion.
Countries Reducing USD Dominance
One of the nations that has been betting against US actions is China, according to data from the US Treasury Department, reducing its Treasury bond holdings and buying more gold. This indicates that China wants to diversify its holdings and reduce its exposure to US 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 holding of US stocks from 25% to 21%, whose purpose was to reduce the risk of the fund and thus increase its returns.
Other countries, specifically in the Middle East, are leading the charge in 2023 to make it easier to trade without interference from the US dollar. In addition, five big emerging economies, Brazil, Russia, India, China, and South Africa, collectively known as the BRICS, have taken such steps.
The growing trend of betting against US stocks by some countries, as well as wealthy investors such as Carl Icahn, is a sign of growing concerns about the future of the US economy. While the economy has shown signs of improvement in recent months, many challenges lie ahead.
Overall, the growing tendency to bet against US stocks is a sign of growing uncertainty about the future of the US economy.
By Audy Castaneda
