The role of the US dollar as the world's
dominant reserve currency is being challenged
at a faster pace than previously anticipated,
according to Stephen Jen, the former currency
expert at Morgan Stanley. The greenback's
share in global reserves dropped last year at
ten times the average speed of the past two
decades, due to a number of countries seeking
alternatives after Russia's invasion of Ukraine
led to sanctions. Adjusting for exchange rate
movements, the dollar has lost about 11% of
its market share since 2016 and double that
amount since 2008.
Jen and his Eurizon SLJ Capital Ltd. colleague,
Joana Freire, noted that "exceptional actions
taken by the US and its allies against Russia
have startled large reserve-holding countries,"
mostly emerging economies from the Global
South. As a result, smaller nations are
experimenting with de-dollarization, while
China and India are pushing to
internationalize their currencies for trade
settlement. Additionally, there's concern that
the dollar may become a permanent political
tool or be used as a form of economic
statecraft to put extra pressure on countries to
enforce sanctions that they may disagree with.
Bloomberg's gauge of the greenback surged as
much as 16% last year as the conflict helped
fuel a rise in global inflation, triggering
widespread interest rate hikes that sank bond
and currency markets. It finished the year up
6%. Despite these challenges, the dollar's role
as an international currency won't be
threatened anytime soon as developing
countries do not yet have the ability to divest
from the greenback for transactions due to its
large, liquid, and well-functioning financial
markets.
However, Jen and Freire warned that the
persistence of those conditions "is not
preordained," and there may come a time
when the rest of the world actively avoids
using the dollar. They wrote, "What needs to
be appreciated by investors is that, while the
Global South is unable to totally avoid using
the dollar, much of it has already become
unwilling to do so."
The US currency now represents about 58% of
total global official reserves, down from 73% in
2001 when it was the "indisputable hegemonic
reserve," according to the Eurizon pair. They
urge investors to appreciate the growing
challenges to the dollar's reserve status and
recognize that the prevailing view of "nothing-
to-see-here" may be too complacent.
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