Monetary authorities are weighing the inflationary and other upshots of Russia's assault on Ukraine. Photo: AFP

Over the past year, inflationary pressures have grown practically everywhere in the world. Among the main reasons are the global energy crisis, supply-chain bottlenecks, and expansionary monetary policy.

The problem with the first two is that no matter what central banks do, it will not help to alleviate the crisis. Otherwise, inflation in Russia, for example, would already be under control. Unfortunately, even after multiple interest-rate hikes, the Consumer Price Index continues to rise.

Moreover, it looks like things might get worse in the next few weeks as winter is coming and energy stocks in both Europe and China remain at low levels. Thus there is a high probability that inflationary pressures will not only not disappear, they may actually get worse. In this context, the question arises: How can one protect one’s wealth and try to sleep well at night?

Normally, in this kind of situation, financial analysts and consultants advise getting out of the market or at least switching to defensive assets such as gold or bonds. Another alternative would be to buy US dollars.

Why the dollar and not the euro, the Japanese yen, the Chinese yuan, or the Swiss franc? The answer is quite simple: Despite the huge liquidity injections into the financial system by the Federal Reserve, the United States continues to play a key role both in the global economy and on the international geopolitical stage.

The European currency, in turn, cannot boast of such a base. Moreover, one shouldn’t forget that many EU countries may face a debt crisis if the European Central Bank decides to raise interest rates.

The disadvantage of the yuan, on the other hand, lies in a more closed financial system and restrictions on the capital flow between China and the rest of the world. In addition, the yuan cannot be considered a freely convertible currency, since its rate is determined by the People’s Bank of China.

Nevertheless, some analysts believe that increased foreign investment into Chinese markets could boost the usage of the yuan, pushing it to become the third-largest reserve currency in the world.

Currently, the yuan accounts for about 2% of global foreign-exchange reserve assets, but in the next eight years, it could rise to between 5% and 10%, surpassing the levels of the Japanese yen and British pound.

In the case of the yen, the main problem lies in the huge debt of the Land of the Rising Sun, negative interest rates, and a permanent policy of quantitative and qualitative easing. In addition, Japan faces serious problems due to its rapidly aging and shrinking population.

As a result, for the time being, there are no good alternatives to the US dollar. In this sense, once the correction in the market begins, people will most probably go to the currency of the world’s leading economy. Still, in the next decade, things might take a different turn.

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.