De-dollarization and global reserves dominance, explained by a top currency economist and the inventor of the 'dollar smile' theory

Happy Saturday, readers. I'm Phil Rosen. Let's talk about the dollar's role on the world stage — and see what one of the leading currency economists has to say about it.

As ever, if you have any suggestions for who I should interview next, let me know on Twitter @philrosenn, or email me [email protected].

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Stephen Jen is a leading economist, the cofounder and CEO of Eurizon SLJ, and inventor of the "dollar smile" theory. This conversation has been lightly edited for length and clarity.

Phil Rosen: You pointed out recently that the dollar saw a steep erosion in 2022 as a global reserve currency. Can you explain what fueled this, and whether the trend will continue?

Our best guess as to the main cause of this is the US' use of exceptional sanctions, including the freezing or confiscation of half of Russia's $620 billion in foreign reserves, as well as outright confiscation of assets owned by Russian oligarchs.

Our best guess is that this trend will likely continue, but probably not to a point where a non-dollar currency commands a bigger market share than the dollar.

More likely, we will evolve from a unipolar reserve currency world to a multi-polar world.

There's a lot of chatter about China's yuan being a possible rival to the greenback. What has to happen for this to come to fruition?

China's financial sector has to improve in quality. For the RMB to challenge the USD, it will take many years, I'm afraid.

The main reason is that foreigners are still uncomfortable investing in Chinese equities and bonds, and the US is trying hard to make this as difficult as possible.

Without foreign demand for Chinese assets, Chinese savers and households cannot be allowed to invest overseas, and thus the capital controls would need to remain in place.

Here's what he said on a potential "tripolar" reserve currency setup if the dollar loses dominance.

What do you think of Jen's outlook on the balance of power for currencies? Let me know.

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10. This fund manager has won out over 90% of his peers in the last year. The small-cap expert shared which stocks he's betting on now — and how to chop down the downside risk in a particularly volatile corner of the market.

Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email [email protected]

Edited by Max Adams (@maxradams) in New York.