Concerns about the US dollar’s global role

This inevitably stirs speculation that the US dollar will decline in value if its role is reduced.

>> Can the US dollar keep going up?

This inevitably stirs speculation that the US dollar will decline in value if its role is reduced. However, on the US dollar’s global role, we’re reminded of that alleged Mark Twain quote that "reports of my death have been greatly exaggerated". Perhaps more importantly, if the US dollar’s role has been declining, or is likely to decline, it could just as easily produce a stronger US dollar, not a weaker currency.

Speculation about the US dollar’s global position seems to have increased again recently. As far as we can see there’s all sorts of ‘evidence’ used to show the currency’s declining allure. One is the position of central banks. Recent data from the World Gold Council suggests that central banks bought 1,136 tonnes of gold last year worth some USD70bn. That’s just about double any rise that we’ve seen going back to the 1950s.

Data on the breakdown of currency reserves also shows a declining trend for the US dollar at about 60% of total allocated FX reserves at the moment compared to over 70% in 2000. Over the same time, the euro proportion has increased from 18% to 20% and we’ve seen a particular uptick in other currencies in recent years, not just the fast-rising renminbi but also the likes of the Australian dollar and the Canadian dollar. But it is not just the central banks.

If we look at international lending, US dollar credit to international borrowers has fallen 2% in the past year according to BIS data which is the biggest fall since the global financial crisis while international lending in the euro has risen almost 9% in the past year and 10% in yen. This being said, the US dollar still dominates with three times more international loans than the euro.

We also have to bear in mind that rapidly rising policy rates in the US compared to elsewhere could have made borrowers switch to the euro or the yen. Nonetheless, there is arguably some evidence to suggest that the US dollar is creaking a bit as the international currency of choice for international borrowers in the private sector and asset holders such as central banks.

Data on private sector asset holders also seems to reveal a pullback with Japanese investors, for instance, who offloaded a record USD181bn of foreign bonds in 2022, most of which are likely to have been US dollar bonds given that higher currency hedging costs reduced the hedged return on treasuries to well below that of JGBs. Bears of the dollar think they can see reasons for the dollar’s apparent demise. These include the alleged debasing of the currency by huge quantitative easing (even if others have done the same as well), the proof of which can be seen in the upsurge in inflation.

Then there’s the alleged challenge to the dollar from crypto currencies or, perhaps more realistically, the faster development of central bank digital currencies by others, particularly the PBoC.

>> What will drive the US dollar in 2023?

Another argument is that the US has "weaponised" the US dollar through its use of sanctions and anyone fearing similar US retribution might want to think about shifting away from the dollar.

"We could go on but, suffice to say, some see plenty of reasons to toll the death knell for the dollar’s dominant global role and something that could undermine the dollar itself. But we are more sanguine on this issue. For one thing, it is not at all clear that the US dollar would likely be usurped by one other currency, such as the renminbi. Instead, a world is more likely to shift to a system of competing international currencies with the US dollar, euro and renminbi, for instance having similar shares. Even more important is the fact that we don’t think this sort of reserve status confers strength in the first place; it might actually confer weakness", said Mr. Steve Barrow, Head of Standard Bank G10 Strategy.

In Mr. Steve Barrow’s view, the dominant global role for the US dollar confers strength only when there is a crisis and the US dollar soars on account of its safe-asset status. But crises happen very infrequently. The rest of the time the dollar is not in demand but in supply as a vehicle to borrow internationally. In essence, we have the opposite of this safe-asset dollar demand and hence in the "normal" or "no-crisis" periods, which is most of the time, the US dollar is more likely to fall than rise as a result of its strong international status.