Changes in the US Dollar and Global Investment Structure: Restructuring of the World Economic Order

 

The Changing Status of the US Dollar and Its Decline as a Global Reserve Currency



The US dollar has long held an absolute position as the world's reserve currency. However, as shown in the graph above, the proportion of US dollars in global foreign exchange reserves has been gradually decreasing over time. The dollar's share, which reached about 87% in the early 1970s, has fallen to 57% as of 2025.

This chart shows several important trends:

  1. Volatility of the Dollar Index (USD): The dollar index, represented by the gray line, has repeated cycles of peaking in 1985 and 2002 and then declining. Recently, it has been showing an upward trend since 2022.

  2. Dollar Share in Global Foreign Exchange Reserves (purple line): The share, which was over 80% in the late 1970s, fell to about 73% in 2001, then declined again to remain at 57% today.

  3. Impact of Fiscal and Monetary Policy: The yellow and blue bars at the bottom of the chart represent the real federal funds rate and the US budget deficit/GDP ratio, respectively. The designation "unsustainable fiscal & monetary policy" emphasizes the negative impact of these policies on the dollar's value and global status.

Particularly noteworthy is the sharp increase in budget deficits during the 2008 financial crisis and the 2020 COVID-19 pandemic (-10.0%, -18.1%). These large fiscal deficits have added pressure to the US dollar's status as a reserve currency.

If a post-globalization world order emerges where the US no longer provides 'vendor-financing' to other countries, the dollar may continue to weaken in its position as the major reserve currency. If fewer dollars are sent abroad, there may also be fewer dollars recycled back into US Treasury bonds and stock markets.

Analysis of Ownership Structure in the US Stock Market


![US Stock Ownership Structure Chart](Image 2)

This logarithmic scale chart shows the changes in the ownership structure of the US stock market from 1972 to 2025. It shows who owns what proportion of the US stock market, which totals $93 trillion:

  1. Households: Holding $38 trillion, they represent the largest share. Households refer to individual investors and include investments through retirement accounts such as 401(k)s and IRAs.

  2. International Investors: Holding $16 trillion, which is the same size as mutual funds.

  3. Mutual Funds: Accounting for $16 trillion, these are traditional investment vehicles preferred by many investors.

  4. Exchange-Traded Funds (ETFs): At $8 trillion, this is a relatively recent investment vehicle that has been growing rapidly. ETFs began to emerge in the late 1990s and now hold a significant share.

  5. Pension Funds: Holding $5 trillion.

  6. Corporates: At $4 trillion, they hold the smallest share.

Particularly noteworthy in this chart is the proportion of international investors ($16 trillion). Connecting this to the weakening status of the dollar as a reserve currency discussed earlier, if fewer dollars are recycled from abroad, international investors' buying of US assets could also weaken. This could potentially lead to increased risk premiums for both bonds and stocks.

Analysis of Ownership Structure in the US Bond Market


This chart shows the ownership structure of the US bond market. The various investor groups in the total $58.08 trillion US bond market hold the following shares:

  1. International Investors: With $14.46 trillion, they are the largest single owner group. This demonstrates the high dependence of US Treasury bonds on foreign investors.

  2. Households: Holding $6.13 trillion.

  3. Mutual Funds: Accounting for $5.45 trillion.

  4. Exchange-Traded Funds (ETFs): At $1.75 trillion, this is relatively small compared to stock ETFs but has been growing rapidly since the mid-2000s.

  5. Pension Funds: Holding $1.55 trillion.

  6. Corporates: At $0.40 trillion (400 billion), they hold the smallest share.

According to the Federal Reserve's flow of funds report mentioned earlier, international investors hold a total of $18 trillion in US stocks and $15 trillion in US bonds. This shows that US financial markets are significantly dependent on foreign capital.

Future Outlook for the US Economy and Global Investment Environment

Combining the data and trends above, the weakening of the US dollar's status as a reserve currency has important implications for US financial markets:

  1. Potential Decrease in International Investor Share: As global circulation of the dollar decreases, the proportion of international investors in US assets may decline.

  2. Higher Risk Premiums: Reduced investment from international investors could lead to increased risk premiums for both bonds and stocks. This could result in higher capital costs for US companies and downward pressure on stock prices.

  3. Upward Pressure on Interest Rates: Reduced purchases of US Treasury bonds by international investors could lead to falling bond prices and rising interest rates.

  4. Impact of De-globalization: The restructuring of global supply chains and de-globalization could bring structural changes to the flow of funds and investment patterns between the US and the global economy.

Implications for Investors

These changes provide several important implications for investors:

  1. Portfolio Diversification: Portfolios concentrated in US assets may be exposed to greater volatility in the future, so the importance of international diversification may increase.

  2. Inflation Hedging: In an environment of dollar depreciation and rising risk premiums, it may be necessary to consider allocations to inflation-hedging assets.

  3. Liquidity Management: Appropriate liquidity management may become more important in an environment where market volatility could increase.

  4. Long-term Perspective: It is important to focus on long-term investment goals and strategies rather than short-term market fluctuations.

Although these trends are progressing slowly, long-term investors need to consider the impact of these structural changes on the investment environment when constructing their portfolios.

(Sources: https://x.com/TimmerFidelity/status/1913249315314622627)

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