This weekend, Brazil's president Luiz Inácio Lula da Silva, called on developing countries to replace the U.S. dollar. His goal is to create a "BRICS" alternative currency, similar in some ways to the euro. BRICS stands for Brazil, Russia, India, China, and South Africa.
Lula isn't alone. Earlier this month, China's yuan supplanted the U.S. dollar as the most widely used currency in Russia. China and Brazil recently reached a deal to settle transactions in one another's currencies, circumventing the need for U.S. dollars.
The threat to the U.S. dollar is real, but replacing it as the global currency won't be simple. There is no valid alternative at this time.
Prior to the financial crisis of 2008, many believed the euro would challenge the dollar for world dominance, but few believe this today. China's government strictly controls capital flowing into and out of the country, making it a poor choice as a reserve currency.
That said, the U.S. Dollar Index ($DXY) chart is bearish. Six months ago, the greenback reached its highest level in over a decade, but that rally has morphed into a bearish head and shoulders pattern.
The dollar is below its 50-day (blue) and 200-day (red) moving averages. Late last week, the index tested the neckline of the pattern (black dotted line). The current bearish move should accelerate if the neckline, located near 101, is broken.
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How can investors benefit from a decline in the dollar? Currencies are measured against one another, so as the dollar falls, the euro rises.
This dynamic is illustrated in the following chart, which depicts the Invesco DB Dollar Bull ETF (UUP) , blue, vs. the Invesco Euro Trust (FXE) , green. Because the euro is the largest component in the U.S. Dollar Index, the inverse relationship between these currencies is strong.
A rising euro provides an earnings tailwind to U.S. companies that have a significant portion of their sales in Europe. As the value of the euro rises, the EUR/USD exchange rate becomes favorable to U.S. companies. In this way, U.S. companies can increase profits without a commensurate increase in sales.
For example, only 49% of Procter & Gamble's (PG) net sales occur in North America (U.S., Canada, and Mexico). Since the majority of its sales occur outside the U.S., P&G stands to gain from a falling dollar.
While shares of Procter & Gamble are flat year-to-date, the company's chart indicates a potential breakout. P&G has formed a rounded bottom pattern over the past three months. The stock's 50-day moving average (blue) recently crossed above its 200-day moving average (red), an indication of bullish momentum (shaded yellow). Based on the pattern, Procter & Gamble could reach $165.
Will the U.S. maintain its status as the global reserve currency? Yes, at least for now. It will take at least a decade for the BRICS nations to form their own currency, if it ever happens at all.
But the eventual existence of a BRICS currency doesn't guarantee its dominance. In the meantime, short-term weakness in the greenback could provide a boost to big U.S. exporters like Proctor & Gamble.
