The fate of the US Dollar as the Global Reserve Currency

Context

Covid-19 is an unprecedented once-in-a-century crisis that has changed the way business is conducted and is fundamentally changing people’s approach to life and their financial decision-making. On a macro level, the same holds true for the government and its fiscal and monetary policies too., A larger paradigm shift that will be witnessed will be the very objectives a nation sets for itself. Global populism is on the rise, regionalism and economic resilience are on every nation’s agenda and globalization is at crossroads. Calls are being made to introduce new reforms and focus on conscious capitalism that embodies a shift from maximizing shareholder value to stakeholder value. The Foreign exchange market, amidst the pandemic, has been even more uncertain. As if the pandemic wasn’t enough, the Biden presidency and rise of China as a global superpower have led to record volatility levels in the forex market. So what does this mean for the mighty US dollar, where does it stand in the times to come? We have got you covered on this….

The Backdrop

Although there is 8 official, recognized international currencies by the IMF (International Monetary Fund), the US Dollar is rightfully considered to be the de facto global reserve currency. It accounts for more than 60 percent of all central bank reserves around the globe. Next, the closest is the Euro at 20 percent. Adding Testimony to this fact is a dominating statistic, that a whopping 90 percent of Foreign Trade involves the US Dollar. And as far as debt issuing is concerned, around 40 percent of the debt is issued in the USD. These are positive statistics as far as the US Dollar is concerned; however recent numbers are indicating a decreasing trend, although a gradual one.

US Dollar: Past, Present and the Future

So for starters, a global currency, also known as a reserve currency, is the one that is usually accepted for trade throughout the world. As revealed above, the US dollar dominates here. The dominance initially began post-WWI; however, its strength was consolidated only after setting up of Bretton Woods Standards in 1944. Going by the latest numbers, USD’s share of central bank reserves fell from 61.2 in the second quarter to percent to 60.4 percent in the third quarter. This was the second straight quarter where it has reported a decline in central bank holdings, according to the IMF. “It is true that the dollar will one day lose its status, as was the case with every global reserve currency before it, but the chances of this happening in our lifetime are exceedingly low,” said David Rosenberg, Chief Economist, and Strategist at Rosenberg Research, in his latest research note. Anywhere in the next 50 odd years, there are no alternatives emerging.it Enhanced global coverage comes at a cost for the US, which often bears the brunt on account of relatively uncompetitive exports. These lead to trade deficits and thus greater financial risk. “The fact that the global financial system runs on dollars and that the Fed is central to its operation—those things haven’t changed, and those facts have been underscored and reinforced in the early stages of the crisis," says Barry Eichengreen, a professor of Economics and Political Science at the University of California at Berkeley.

While it is unimaginable to see the dollar losing its place as the world’s reserve currency, a glance through history tells us it’s very much possible. The Dutch guilder filled the role in the 17th and 18th centuries, before the Spanish dollar took over, followed by the pound sterling from 1860 until at least 1914. In each case, the nation’s domination of global trade and finance was key to the currency’s status, though central banks and regulatory bodies did play a role.

Concluding Remarks

Such centrality of the USD makes it convenient for international transactions and trade. Most countries want to hold their reserves in a currency with large and open financial markets since they want to be sure that they can access their reserves at the time of need. USD and US are second to none in this case. The dollar is the first choice for Oil and Energy transactions too, which are critical for developing markets. Oil is primarily bought in USD which is why Saudi Arabia pegs its currency to the dollar. The size and access of the American economy, their financial market, and the largely stable USD are beneficial for developing countries. Thus, the dollar remains an undisputed King for at least a few decades to come, if not more. However, it doesn't take long for powers to change hands, with digital currency and cryptocurrencies fast gaining steam as financial assets globally. Therefore, to sum up, the dollar stands nice and strong knowing it will, in all likelihood, face daunting challenges from various quarters.

Until Next Time……..


References -

https://www.thebalance.com/world-currency-3305931

https://internationalbanker.com/finance/is-the-us-dollars-role-as-the-worlds-reserve-currency-under-threat/

https://www.livemint.com/market/stock-market-news/is-us-dollar-s-reign-as-world-s-reserve-currency-is-under-threat-11596175872376.html

https://economictimes.indiatimes.com/markets/forex/us-dollar-share-of-global-reserves-slide-in-q3-imf-data/articleshow/79951609.cms?from=mdr


Technical Terms-

· Bretton Woods System:-

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement.

·Currency Pegging:-

A currency peg is a policy in which a national government sets a specific fixed exchange rate for its currency with a foreign currency or a basket of currencies. Pegging a currency stabilizes the exchange rate between countries. Doing so provides long-term predictability of exchange rates for business planning.


Edited by: Ayush Bakshi