Remember February 2022? Russia invaded Ukraine, the United States government and its partners in the G7 froze $300 billion of the Russian Central Bank’s assets. Commodity prices soared. Many analysts – like Zoltan Poszar at the now defunct bank Credit Suisse – predicted that this would trigger the end of the “dollar system”. That is, the US dollar would cease to be the world reserve currency and be replaced by something else. Commodity prices, including gold, would rise, and the dollar would fall against other currencies, which would make life especially hard for Americans. The BRICS countries – Brazil, Russia, India, China, and South Africa – would use their dominance in the commodity markets to supplant the dollar.
Wouldn’t it be interesting if the price of dollars, the price of gold, and the prices of commodities all rose at the same time? What if the dollar became even more entrenched in the global financial system because commodities keep getting more expensive? We’re starting to see signs that that’s exactly what is happening.
First, what keeps the dollar in its position as the world reserve currency? Ultimately, it boils down to debt. Most real investment – think factories, mines and office towers – is done with borrowed money. The “pool” of loanable funds is global, and the currency most investors prefer to lend in is the dollar. Foreign banks and corporations find themselves borrowing dollars – lots of them. Therefore, they are guaranteed to need dollars later in order to pay back their debts. For every million dollars that are lent, a million dollars, plus interest, will be demanded in the future. That’s “entrenchment”.
When foreign corporations, or even governments, need to borrow large sums of money, they tap the “Eurodollar” or “Offshore dollar” market, the market for dollars outside the US. The data on this shadowy part of the financial system is scarce, but there are always signposts showing what it’s up to. In the early days – the 1960s and 70s – every week there would be a new story about a foreign government or company borrowing dollars offshore. Ten million here, fifty million there.
60 years later, not much has changed. The Adani Group is a massive conglomerate based in India, with its hands in agriculture, energy, water, and many other industries. Today, Bloomberg reported that the company is soon to borrow $600 million in the offshore dollar market. The lenders include BNP Paribas, Mitsubishi Financial, and Mizuho Bank, three international banks that have been in the offshore lending business for decades.
There’s more to come: Adani Group plans to spend up to $100 billion on green transition projects over the next decade. Where will they get the money? The Offshore dollar market.
If we pan over to the Congo, we see China structuring a deal with the local government for access to highly sought after copper deposits. This is part of China’s famous (or infamous) Belt and Road Initiative, which is also thought to be a strike against the dollar’s dominance. The new contract will lend $7 billion to the Congo for infrastructure projects that will support the mining operations in the country. Not $7 billion worth of China’s currency, the Yuan, seven billion dollars.
It’s becoming increasingly clear that demand for commodities – especially metals and rare earths – will have a major tailwind for the next several years. But contrary to what “dollar bears” (people who think the greenback is on its last legs) predicted, this commodity bull run will not come at the dollar’s expense. If anything, the massive demand for funding of major industrial projects will increase international demand for America’s currency.