Skip to content

CONTRIBUTORS

Nicholas Hardingham, CFA

Portfolio Manager, Franklin Templeton Fixed Income

Stephanie Ouwendijk, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Robert Nelson, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Joanna Woods, CFA

Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income

Carlos Ortiz

Research Analyst, Franklin Templeton Fixed Income

Jamie Altmann

Research Analyst, Franklin Templeton Fixed Income

Preview

Inspired by President Javier Millei’s proposal to dollarise Argentina, this paper explores the phenomenon of dollarisation, where countries adopt a foreign currency, most commonly the US dollar, to address economic challenges and goals.

Various factors fuel the move towards dollarisation, and monetary stability is the primary catalyst among them. As such, nations facing economic turmoil, marked by currency devaluation and hyperinflation (for example, Ecuador and Zimbabwe), see dollarisation as a fast track to restoring economic equilibrium. Meanwhile, countries with open economies and robust private sectors (such as Panama), lean towards dollarisation to enhance trade and economic stability. This strategy is especially beneficial when the adopted currency aligns with a nation's principal capital and trading partners. The relationships between the United States and Panama, the eurozone and countries like Montenegro/Kosovo, and South Africa with Lesotho/Eswatini are examples. Additionally, cases like El Salvador highlight a desire to bolster already-established monetary stability to further attract foreign investment and instil confidence in the national economy.

In this paper, we differentiate between full and soft dollarisation and the reasons driving these different shades of dollarisation. We consider the following:

  • Forms of dollarisation
  • Dollarisation, a cost-benefit analysis.
  • The process of dollarising.
  • Case study: Argentina eyeing dollarization
  • The double-edged sword of Zimbabwe's multicurrency regime
  • Does dollarisation actually work?

The impact of dollarisation on economic growth is seemingly mixed. Given the small subset of countries that have dollarised, it is difficult to draw hard conclusions other than that it has had a seemingly positive effect on these particular countries. The mixed evidence on the impact of dollarisation means that applying what occurred in dollarised economies to others may not be totally applicable given their unique characteristics and the lack of external validity of prior research. Therefore, a country would need to assess their own unique circumstances before taking the leap to dollarisation and ensure it meets certain preconditions before it does so.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors.

Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. 

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.

You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.