A sharp economic slowdown seems to be looming in both Europe and the US, which would make bond markets attractive again, especially in the US. Conversely, the Chinese economy is expected to reaccelerate. International monetary system set to become multipolar as geopolitical factors are likely to prevail.
Inflation’s return will impact the strategic allocation of all long-term investors, especially central banks and sovereign funds. The Federal Reserve is normalising monetary policy swiftly, which has caused a rapid rise in long-term interest rates in the US and, to a lesser extent, Europe. This has helped strengthen the dollar.
At the same time, a sharp economic slowdown (or even recession) seems to be on the cards in both Europe and, possibly, the US. This would give many investors the opportunity to reposition themselves in US Treasuries. At current levels, US bond yields are becoming more attractive compared to Chinese bond markets. When inflation slows, which we expect to happen in 2023, US bond yields will become even more attractive.
Does this mean that the dollar will continue to dominate the international monetary system? This old question resurfaces from time to time. Despite major structural changes in the monetary system over the past 60 years, the dollar remains the dominant international reserve currency. Yet the dollar’s share of global reserves has fallen to 59% from 71% in 1999, when the euro launched. This shows that central banks were gradually moving away from the dollar before Russia’s war in Ukraine. Some expect this trend to continue or even accelerate as central banks in emerging economies seek to further diversify their reserve mix.
