IS KING DOLLAR’S STATUS AT RISK? CHANGING ROLE OF CURRENCY : The US has a large and dynamic economy 26% of world GDP : The dollar’s share of global reserves has...
Ibrahim Patel
Mumbai : The US dollar is the world’s dominant currency. There is persistent speculation that the dollar’s status is at risk. In early June, a rumour began to circulate – which was widely reported in the Indian press as true – that the government of Saudi Arabia had allowed its petrodollar agreement with the United States to lapse. The dollar plays a major role in global trade. As of 2024, the much dollar is used in 40% of foreign trade invoices globally.
The role of 'king dollar' in the medium to long term is not immutable, carrying with it repercussions for investors across the globe. The US dollar has been the world’s dominant currency since the 1920s, when it overtook the British pound. Governments and central banks around the world hold dollar-dominated assets, usually US Treasury debt, as reserves to manage the foreign exchange value of their currencies or weather economic shocks.
The outsized role of the USD as a store of value (or reserve currency); as a unit of account (or funding currency); and as a medium of exchange (in trade and forex transactions) on the global stage has been enshrined by three key interrelated movements. The US has a large and dynamic economy 26% of world GDP and a track record of stability backed by investor protections and the rule of law.
The size and stability of the US economy means the dollar is an effective store of value and safe haven for foreign investors, who have confidence in the dollar. And as a currency broker’s notes, economic and geopolitical turmoil serves only to intensify the quest for safe investments, usually leading investors back to the dollar, which remains the most trusted currency.
Dollar assets comprise about 59% of global foreign currency reserves; the next largest share is the euro at 20%. Governments world over borrow money in dollars to insure their creditors against foreign exchange risk; 64% of world debt is denominated in dollars. The dollar makes up a large portion of international payments.
Now the question Is the dollar losing market share? Yes, by some measures. For instance, the dollar’s share of global reserves has fallen from more than 70% in 2000 to 59% today. Foreign reserves are not flowing to the dollar’s major competitors, the euro and the yen. Instead, reserves are going to what are sometimes called “non-traditional currencies,” such as the Canadian dollar, the Australian dollar, and the Chinese Renminbi.
Apart from China, these are the currencies of stable countries with strong economies and close relationships with the United States. That stability, combined with higher returns on reserves that central banks may earn from diversifying their currency holdings, may explain part of this shift. Is the dollar destined to lose its dominance? Most economists think not, at least not any time soon. First, in some instances, the dollar’s prominence has increased, not fallen. Outstanding debt securities held in dollars have grown from 49% in 2010 to 64% in 2024, for example.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.)
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