Investors fret about dollar’s status as reserve currency
PHOTO: REUTERS
Some investors are worried the US response to the coronavirus pandemic is dealing a body blow to the dollar, potentially accelerating what has so far been slow erosion in the greenback’s status as the world’s dominant reserve currency.
Investors and analysts, including billionaire hedge fund manager Ray Dalio and Goldman Sachs Group strategists, are among those who have warned that massive US government spending in recent months could hurt the dollar. At the same time, rock-bottom US interest rates for the foreseeable future and concerns over a potential rise in inflation are denting the dollar’s appeal.
These factors are already weighing on the dollar, which stands 9% below its high of the year and notched its worst monthly performance in a decade in July.
Changes that may affect the dollar’s reserve currency status “have historically been glacial”, said Alan Ruskin, Chief International Strategist at Deutsche Bank AG. “Lately, they have been speeding up.”
Treasury Secretary Steven Mnuchin told CNBC last month that the dollar’s status as the world’s reserve currency is in the US interest and the administration wants to maintain it. The Treasury declined to comment further.
The dollar’s dominance endows the US with many benefits, ranging from an outsized influence over the world’s financial system to giving it the power to flex its muscle abroad by punishing rivals and bringing errant foreign players to heel. For the world’s central bankers, the dollar remains the reserve currency of choice by far.
The dollar’s share in global central bank reserves stood at around 62% in the first quarter, compared with about 20% for the euro and 1.9% for the yuan, according to the International Monetary Fund. Past concerns about the dollar’s top-dog status, including those that cropped up after Standard & Poor’s in 2011 downgraded its credit rating of the United States, have proven short-lived, due in part to the lack of a credible replacement. The main challenger, the euro, has struggled in the face of existential crises and years of subpar growth in the euro zone.
Mohamed El-Erian, Chief Economic Adviser at Allianz, believes there is little imminent danger to the dollar’s reserve currency status. “It is hard to replace something with nothing,” he told the Reuters Global Markets Forum on Tuesday.
Published in The Express Tribune, August 6th, 2020.
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