Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How Foreign Direct Investment Is Bypassing the Strong Dollar
Transcript
- Lucas: So the strong dollar has been the story for, what, two years now? And conventional wisdom says a strong dollar is great for U.S. consumers but terrible for American exporters and emerging markets. But there's a subtler shift happening beneath that headline. Luna: You're talking about how foreign direct investment is actually bypassing the dollar, right? I saw a headline that the dollar's share of cross-border M&A dropped below 70 percent for the first time since 2003. Lucas: Exactly. That's from the IMF's latest Coordinated Portfolio Investment Survey, released last week. And UNCTAD's World Investment Report, which came out yesterday, confirms it. The dollar still dominates — about 68 percent of all FDI transactions are dollar-denominated — but that's down from 82 percent a decade ago. The beneficiaries are the yuan, the euro, and surprisingly, the yen. Luna: Before we go deeper — I know I say this every few episodes, but if these conversations have helped you think about global business or trade in a more concrete way, it genuinely makes a difference when listeners chip in. A couple of dollars a month is what keeps this ad-free. You can find it at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does. And it's not about big donations — small, regular support is what keeps us independent. So thanks to anyone who already does that. Now, let's get back to that chemical company story I mentioned. Lucas: So the case that really caught my attention is a mid-cap German chemical company — I'm not naming it because the deal hasn't been fully disclosed, but it's a specialty plastics manufacturer based in Baden-Württemberg. It wanted to build a new factory in South Carolina to supply BMW's Spartanburg plant. You'd think that would be a dollar-denominated deal, right? American factory, American customer. Luna: Right, but they financed it in euros from a Chinese bank. Lucas: Exactly. A Chinese state-owned bank — Bank of China's Frankfurt branch — provided a euro-denominated loan at a spread over Euribor. The German company swapped the euros into dollars via a currency swap line that the PBOC has with the ECB. So the entire transaction never touched the dollar-based trade finance system. Luna: That's fascinating. So the strong dollar actually incentivized this. Because dollar borrowing costs are higher — the Fed's still at elevated rates — while euro rates are lower, and the PBOC is eager to push yuan and euro liquidity to reduce dollar dependence. Lucas: Precisely. The PBOC now has bilateral swap lines with over 40 central banks. The ECB has its own network. What you're seeing is a parallel system emerging — not replacing the dollar, but offering an alternative for specific corridors. The germany china europe triangle is one. Another is India-Gulf. Luna: You mentioned the adani pif deal earlier. That's a great example — Adani Green Energy and Saudi Arabia's Public Investment Fund built a solar plant in Gujarat, and the deal was structured entirely in rupees and riyals. No dollars involved at any stage. Lucas: And that's a 1.2 billion dollar project. It's not small. The Indian rupee is not fully convertible, but Saudi Arabia has been running trial settlements in rupees for oil purchases. So the PIF had rupee holdings already. They used those to fund the equity, and Adani raised the debt in rupees from Indian banks. The entire capital stack was non-dollar. Luna: How big is this trend in aggregate? The IMF data — is it just M&A, or does it include greenfield projects too? Lucas: The UNCTAD report covers both. And they estimate that in 2025, about 23 percent of global greenfield FDI — that's new factories, data centers, infrastructure — was denominated in currencies other than the dollar. Up from 12 percent in 2019. The euro accounted for about half of that non-dollar share, the yuan about a quarter, and the yen and others the rest. Luna: So the euro is actually the biggest beneficiary, not the yuan. That's counterintuitive — everyone talks about China's push for yuan internationalization, but the euro is already there. Lucas: Right. The yuan's share is growing from a tiny base — it's about 4 percent of global FDI now, up from 1 percent in 2019. But the euro's share has gone from 12 percent to 16 percent. Part of that is European companies investing in Europe — intra eu FDI is always euro-denominated. But a bigger part is non-European companies choosing euro financing because it's cheaper and the ECB's swap lines are reliable. Luna: What does this mean for the dollar's reserve status long term? We've been hearing 'de-dollarization is coming' for years, but it never really happens. Lucas: I think it's important to distinguish between reserve currency status — which is about central bank holdings — and transaction currency status, which is about trade and investment flows. The dollar's share of global reserves has declined slowly, from about 71 percent in 2000 to 58 percent in 2025. That's real but gradual. The shift we're seeing in FDI is faster because it's driven by concrete cost advantages, not geopolitics. Luna: So the strong dollar itself is accelerating this. Because it makes dollar financing more expensive, and it pushes borrowers to look for alternatives. There's an irony there. Lucas: Exactly. The Fed's high rates make dollar loans expensive, while the PBOC and ECB are keeping rates lower. So a Chinese bank can offer a euro loan at 3.5 percent when a dollar loan might cost 5.5 percent. That 200 basis point spread is enough to justify the complexity of setting up swap lines and hedging. Luna: But there's still the question of liquidity. Are these alternative pools deep enough to support really big deals — like a 10 billion dollar mega-project? Lucas: Not yet. The dollar market for FDI is still roughly three times larger than the next biggest — the euro — in terms of liquidity. For a 10 billion dollar project, you'd almost certainly need a dollar tranche. But the threshold is rising. Five years ago, anything over 500 million dollars was dollar-only. Now we're seeing billion-dollar projects done in euros or yuan. The adani pif deal was 1.2 billion. The German chemical plant was 800 million. These aren't small experiments. Luna: And the infrastructure is improving. More and more clearing houses are accepting non-dollar collateral. The London Clearing House now accepts euro and yen collateral for margin. That wasn't true five years ago. Lucas: Right. And the Chinese are building their own infrastructure — the Cross-Border Interbank Payment System, CIPS, processed about 1.3 trillion dollars worth of transactions in 2025. That's still a fraction of SWIFT's 50 trillion, but it's growing at 30 percent year-over-year. Luna: So where do you see this going in the next two years? Is there a tipping point where the dollar's share of FDI falls below 50 percent? Lucas: I don't think so. Not in two years. But I can see it hitting 60 percent by 2028 if the Fed stays elevated and the ECB and PBOC keep expanding their swap networks. The real question is whether the U.S. responds. If the Fed eventually cuts rates, that spread narrows, and the dollar becomes more attractive again. But the infrastructure for non-dollar deals is sticky — once a company sets up a yuan-denominated loan facility, they'll use it again. Luna: So even if the dollar weakens, the alternative systems won't just disappear. Lucas: Exactly. That's the key insight. The strong dollar created the incentive to build these alternatives. But once built, they persist. So we're likely looking at a permanently more multipolar FDI landscape, even if the dollar remains the largest single currency. Luna: One final thought — what does this mean for an American company looking to attract foreign investment? Should they be preparing to accept non-dollar capital? Lucas: I think they should. If you're a U.S. subsidiary of a German parent, or you're selling a stake to a Chinese sovereign wealth fund, being able to structure the deal in euros or yuan could give you access to cheaper capital. It's not just about the headline rate — it's about matching the currency of your revenue streams. If your factory sells to BMW, your revenue is effectively euro-linked anyway. Luna: That's a good place to leave it. Next episode, I want to dig into how this affects trade finance for small and medium exporters — because they don't have treasury teams to manage swap lines. Lucas: That's a perfect follow-up. Let's do that.