Predictions of the Dollar’s Decline Are Nothing New
The Dollar is deeply embedded in international trade, money movement, and central bank balance sheets. While we may see some diversification away from the Dollar in the future, the position of the Dollar as the global reserve currency is not something we anticipate witnessing in the near-, mid-, or long-term future. It is also important to note that headlines over the declining position of the Dollar as a global reserve currency have been appearing for decades. There was a cover story on the Economist in 2004 about the decline of the Dollar, it has not materialized in the 20 years since the article’s publication.
Saudi Arabia Has an Inherent Interest in Dollar’s Strength
Saudi Arabian Representatives recently said they were open to discussions about selling oil in Chinese Yuan. Brazil and China recently reached a deal to conduct trade directly in their own currencies. These headlines have caused speculation about U.S. Dollar’s position as the world’s reserve currency. While Saudi Arabia has a growing relationship with China, it still has a very long and strong relationship with U.S. Politics aside, a significant switch away from settling oil sales in Dollars would have dramatic and possibly unforeseen consequences on the Saudi economy. Saudi Arabia has an inherent interest in the strength and stability of Dollars as, like many other gulf oil-producing nations, Saudi Arabia’s currency, the Riyal, is pegged to the Dollar and trades at a fixed exchange rate.
No Other Attractive Dollar Replacements
Getting away from just Saudi Arabia and Brazil directly, there are no other particularly attractive currencies to replace the Dollar in terms of liquidity, stability, and political concerns. While the use of the U.S. financial system to achieve geo-political goals through sanctions and other means may not be viewed favorably by some nations, the Chinese Yuan is not a safe alternative. China still tightly controls its capital accounts and has a long history of working to keep its currency valuation low to benefit its exports businesses. Although there is some concern over U.S. dominance in the global financial system being used to advance political goals, a shift to the Yuan as a global reserve currency hardly removes the concern of politics infiltrating financial systems.
Dollar Seen as a Safe-Haven
In times of stress the world looks to the U.S. Federal Reserve to take action, and this supports the Dollar. During 2020 Federal Reserve action helped calm markets. Even in 2011 when debt ceiling in-fighting in congress led to the S&P downgrading Treasury debt from its AAA status, markets reacted by buying treasuries, not selling them.
The Dollar Is Deeply Entrenched as the World’s Reserve Currency
The Dollar is deeply entrenched as the world’s reserve currency. 80% of global oil sales are conducted in Dollars. Around 60% of global central bank reserves are in U.S. Dollars, compared with less than 3% held in Chinese Yuan. The Dollar was on the opposite side of 88% of all currency transactions in April of last year. Between 1999 and 2019, the Dollar accounted for 96% of trade settlements in the Americas and 74% in the Asia-Pacific region. Globally, around 80% of all global cross-border transactions involve Dollars.
Many Structural Barriers to Dollar Competition
While there is some desire in some countries to move away from the Dollar, any process to reduce global dependence will not happen overnight, and there are many structural barriers to another currency competing with the Dollar as the global reserve currency.
Written by: David Goldstone, CFA®