Dollar Threatened by Domestic Diversification

Most Dollar bulls cringe when they hear the word “diversification.” Within the context of forex, diversification usually refers to the shift towards non-Dollar denominated assets among Central Banks. The thinking is that with the declining Dollar, it probably makes sense to hold reserves in non-US investments. However, analysts have begun to realize that this only represents a small segment of entities that could harm the Dollar by diversifying. The world’s Central Banks probably hold at most $5 Trillion of reserves, whereas US institutional investment funds probably have over $20 Trillion collectively invested in US assets. Thus, diversification in this segment probably poses a much greater threat to the long term health of the USD.