The debt ceiling debate, along with a weakening dollar, has led to questions about the U.S. dollar losing its status as the global currency of choice. In fact, according to the research group GlobalData discussion of de-dollarization on platforms such as Twitter and Reddit were up 600% during the first quarter of 2023, compared to the last three months of 2022.
The value of the dollar has declined relative to other global currencies over the last five months. However, a weaker dollar can be good news for the global economy. It lowers the cost of U.S. goods and services for the rest of the world and lowers the cost of repaying dollar denominated debt. “It’s a release valve for global growth,” said Nick Wall, head of global foreign-exchange strategy at J.P. Morgan Asset Management. “Sixty percent of global liabilities are denominated in dollars; a lot of those are in emerging markets, and emerging markets are responsible for maybe two-thirds of global growth in the last decade.”
Let us put the recent weakness of the dollar in perspective. It is well within its historical range of the last four decades, see the chart below. We could see more dollar weakness as the Fed halts rate increases and other countries continue to increase interest rates, making foreign currencies more desirable.
The chart shows the Dollar Index over the last 43 years starting in 1971 to the present. The United States Dollar Index or DXY measures the performance of the dollar against a basket of other currencies including the euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CNY), Swiss franc (CHF), and Swedish krona (SEK)
A few statistics demonstrate the dominance of the dollar. According to the Bank for International Settlements (BIS), non-U.S. banks state that 62% of the foreign currency of banks are denominated in U.S. dollars. Non-U.S. firms that borrow from banks and from the corporate bond market often do so by issuing dollar-denominated debt, more so than any other non-local “hard” currency, such as euros. The dollar is also the predominant reserve currency, accounting for 64% of worldwide official foreign exchange reserves.
From a long-term historical perspective there is precedent for dominant global currencies to change over time. The British pound used to be the dominant currency for over a century. And there were others before that.
However, the dollar is still the dominant currency for international transactions. Surveys of foreign-exchange markets conducted by the BIS confirm that although the dollar is losing some market share, it remains a long way ahead of the competition. The second chart shows how dollar transactions have held steady above the 80% level for all international transactions since 1989.
The chart shows the Bank for International Settlements 2022 Triennial Central Bank Survey of Foreign Exchange. Each year will add up to 200%, as each transaction has two sides: for instance, a U.S. dollar to Euro transaction. The U.S. dollar at 88% represents the dollar as one side of the contract in 88% of all transactions globally.
For the U.S. dollar to lose its status as the currency to transact in, you need to ask which currency would replace the U.S. dollar. While the most common answer is the Chinese yuan, there is little evidence of this occurring. We would need to see the People’s Republic of China have more transparency with financial flows and economic data, and less currency manipulation and a consistent predictable free market governance.
The U.S. dollar has been able to gain and maintain its special status because of the enduring strength of the U.S. economy. The U.S. is still the largest economy in the world, with an annual GDP of $23 trillion, $5 trillion higher than China. And the dollar is considered the safest currency there is, with other countries keeping dollars in reserve. For those reasons the U.S. dollar is the world’s global currency. In times of financial stress, the U.S. dollar increases in value relative to other currencies.
At the recent 2023 Berkshire Hathaway annual meeting, Warren Buffett said, “We are the reserve currency. I see no option for any other currency to be the reserve currency.” He called the notion of bitcoin or other tokens dethroning the dollar a joke. The U.S. dollar is the currency of choice and will likely remain that way for many years because it represents a growing, large, diversified, stable, transparent economy.
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