Dollar doomsters have got it all wrong

Financial Times

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As every connoisseur of the more excitable bits of the financial blogosphere can tell you, the dollar is on an unstoppable trajectory to disaster.

One recent post argued that the US has, like the Roman empire before it, weakened itself relative to other world powers. The dollar’s central role in the global financial system is in decline as “the people in charge never seem to miss an opportunity to dismantle capitalism brick by brick”.

That’s the argument. We’ve all heard it for more than two decades and we’ll hear it again, now with the added spice of dark geopolitical trends; the move in 2022 to punish Russia for its full-scale invasion of Ukraine by freezing its dollar reserves held abroad means lots of countries might now look to stash their rainy day funds in other currencies.

A global effort — co-ordinated or otherwise — to demote the dollar could happen. If executed at serious scale it would remove the exorbitant privilege from the US of issuing debt on its own terms safe in the knowledge that other national authorities will lap it up. This would change the game in markets and trade. But evidence to suggest it is already happening is limited at best.

The share of global central bank reserves held in dollars has declined in recent decades. Back in 2016, the currency made up more than 65 per cent of official reserves, according to data from the IMF. By the end of 2023, that had shrunk to 58.4 per cent. The amount held in Chinese renminbi at the start of 2016 was zero. Between the end of that year and 2023 it jumped 188 per cent. But while that sounds huge, it is still just a 2.3 per cent slice of the total.

However, a recent blog from the New York Fed argues that the apparent pullback away from the dollar is not down to a global cooling on the buck. Instead, the shift is attributable to a small number of countries, including Switzerland, where a long-running effort to hold down the franc just over a decade ago led to a huge accumulation of euros. “Indeed, increasing US dollar shares from 2015 to 2021 were a feature of 31 of the 55 countries for which there are estimates,” economists at the New York Fed

The full article is available here. This article was published at FT Markets.