A few years back, I went to college here in the U.S., but I would still fly home every summer to spend some time with my family in Brazil.

I always saved all the cash from my school job to cover my expenses during the summer. But luckily, I didn’t have to worry about saving too much. After all, back then a dollar would stretch pretty far in Brazil.

I remember going home and thinking how everything was so cheap for me. In the summer of 2003 for example, one dollar was worth almost three times more than the Brazilian real. So essentially everything was three times cheaper for me, because I was paying my real denominated expenses with dollars I earned during the school year.

I remember how every time I went out with my friends they always wanted me to pick up the tab. They would always say, “Evaldo should pay because he gets paid in dollars.”

But last time I went home, a couple of years ago, my dollars didn’t buy quite as much. Nothing seemed as cheap as before. And my friends no longer thought getting paid in dollars was such a big deal. At that time, one dollar could buy less than 2 Brazilian reais.

The Best Performing Currency of the Year

My story is pretty common. After all, the dollar steadily declined against the real for the better part of this decade.

In fact, the collapse of the housing market in the U.S. was the only thing that interrupted that long-term appreciation, as you can see on the chart below. Then of course, the dollar continued dropping again.

Last year the real depreciated more than 60% against the dollar. But the currency has already recovered most of its losses. In fact, the Brazilian real has been the best performing currency this year. The currency is now approaching pre-crisis levels.

Although we might see some blips and occasional dollar rallies, the long-term trend is clear. And the Brazilian real won’t be the only emerging market currency that will continue to appreciate against the dollar in the long run.

Looking At the Broader Picture…. Will History Repeat Itself?

Few people realize that we’re living through a major shift in the global economy. What we’re experiencing today is the sort of development our grandkids will be studying in their history books.

I remember learning from history classes that the U.K. was the largest economy in the world up until 1872, when the U.S. took over. Then 85 years later, the dollar replaced the British pound as the world’s reserve currency.

So I wonder if our future generations will be studying a similar shift of power in history books. China will soon replace the U.S. as the largest economy. And maybe this time it won’t take as many as 85 years for the dollar to lose its world’s reserve currency status.

We’re already seeing Central Banks around the globe diversifying away from the dollar. They are essentially planting the seeds of a new monetary system, where the dollar will no longer be the only currency reigning around the globe.

Western economies, especially those drowning in debt like the U.S., European Union countries and the U.K., will continue to lose economic power in the global scenario. They will have to address their skyrocketing debt levels. And that will imply lower growth rates going forward.

For the past decade, emerging markets’ contribution to global growth has already been increasing. And last year’s crisis will only accelerate this shift of power from West to East. Currencies from most emerging markets will appreciate on the back of a stronger domestic economy and weak dollar fundamentals.

Bottom line: The Brazilian real is just the first in a long line of emerging market currencies set to outpace the dollar. Stay long the emerging markets, and short the dollar long-term.

Best Regards,
Evaldo Albuquerque

Evaldo Albuquerque is a Head Researcher for World Currency Watch and co-editor of Exotic FX Alert. To learn more about how the dollar’s days as our world reserve currency are numbered, read our special report here.