The potential end to the petrodollar 🛢️1. The maturation of over USD7 trillion in government debt 💸2. The increasing share of non-USD currencies in cross-border transactions and central banks worldwide3. These unprecedented risks have the potential to cause significant USD depreciation and to adversely affect the USD’s standing as the world’s reserve currency, adding fuel to the de-dollarization movement. This article will therefore analyze possible scenarios and their impacts on the DXY and US 10-year treasury yield.
Scenario #1: The Status Quo (30% probability)
In this scenario, the DXY (US Dollar Index) remains stable. The US government’s ability to support its currency and manage debt plays a crucial role. Additionally, Saudi Arabia’s eventual renewal of the petrodollar agreement supports the dominance of the USD.
| Δ%DXY (US Dollar Index) | ~0% (no change) |
| US 10-year treasury yield | ~4.2-4.3% (no change) |
Scenario #2: Petrodollar At Risk (50% probability)
The petrodollar agreement falters, and alternative currencies gain prominence in global trade. Reduced purchases of US bonds prompt the US to raise interest rates to attract investors.
| Δ%DXY (US Dollar Index) | ~10-15% decrease |
| US 10-year treasury yield | ~5-5.5% |
Scenario #3: Rushing to Exit (20% probability)
Investor confidence wavers as concerns mount over US debt sustainability and USD stability. Central banks bolster gold reserves even more and reduce holdings of US debt to hedge against potential USD depreciation4. The DXY experiences a crash, compelling the US to raise interest rates.
| Δ%DXY (US Dollar Index) | ~30% decrease |
| US 10-year treasury yield | ~6-7% |
In conclusion, the USD may be at risk of depreciation in the future. While US fixed income assets remain attractive, investors must remain vigilant about the substantial risk of currency devaluation, which could potentially impact returns. Although extremely unlikely, foreign doubts about the US’s debt servicing capacity—especially with over $7 trillion maturing this year—could lead central banks to reduce their holdings of US treasury bonds. Such a scenario might exacerbate the existing debt surplus, potentially reaching $10 trillion and eroding investor confidence in the US economy.
Sources:
- Saudi Arabia Finance Minister (2023): “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal…”
- https://www.apolloacademy.com/31-percent-of-all-us-government-debt-outstanding-matures-within-12-months/; “ballooning U.S. government debt”, BlackRock 2024 Global Outlook
- IMF – “the share of RMB in all cross-border transactions of Chinese non-bank entities with foreign counterparts was close to zero 15 years ago but has risen to reach around 50 percent in late 2023”, https://www.imf.org/en/News/Articles/2024/05/07/sp-geopolitics-impact-global-trade-and-dollar-gita-gopinath
- Reuters – “China’s central bank added 160,000 troy ounces of gold to its reserves in March, it said. Turkey, India, Kazakhstan and some eastern European countries have also been buying gold this year.”
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