As dollar slides, some investors fret about its status
as world's reserve currency
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[August 05, 2020] By
Saqib Iqbal Ahmed
NEW YORK (Reuters) - Some investors are
worried the U.S. response to the coronavirus pandemic is dealing a body
blow to the dollar, potentially accelerating what has so far been a slow
erosion in the greenback's status as the world's dominant reserve
Investors and analysts, including billionaire hedge fund manager Ray
Dalio and Goldman Sachs Group strategists, are among those who have
warned that massive U.S. government spending in recent months could hurt
At the same time, rock-bottom U.S. interest rates for the foreseeable
future and concerns over a potential rise in inflation are denting the
These factors are already weighing on the dollar <=USD>, 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 U.S. interest and the
administration wants to maintain it.
The Treasury declined to comment further.
The dollar’s dominance endows the U.S. 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 of 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
Foreign holdings of U.S. Treasuries, considered among the world’s safest
investments, rose to $6.86 trillion in May.
Graphic - Currency composition of FX reserves:
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. Indeed, during the
throes of the coronavirus panic in March, the dollar’s dominance was on
full display, with investors and governments scrambling for the
greenback as they looked for a haven against extreme volatility and
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.
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Four thousand U.S. dollars are counted out by a banker counting
currency at a bank in Westminster, Colorado November 3, 2009.
REUTERS/Rick Wilking/File Photo
Nevertheless, the dollar has seen its status slowly degrade over the past two
decades, with its share of global central bank reserves falling by about 10
percentage points, IMF data shows.
Some market participants worry that recent U.S. actions may tarnish the
One concern is the state of U.S. finances. U.S. debt is expected to exceed 130%
of gross domestic product by 2021, according to Fitch, which revised the outlook
on the United States' triple-A rating to negative from stable on Friday.
Although most countries are similarly ramping up spending, U.S. fiscal account
deficits were already among the biggest in the developed world before the
pandemic hit, Ruskin said.
The concern is shared by Dalio, founder of the $138 billion hedge fund
Bridgewater LP. In a late July appearance on "Fox & Friends," Dalio said he
worried about "the soundness of our money."
"You can't continue to run deficits, sell debt or print money rather than be
productive and sustain that over a long period of time," Dalio said.
In a recent blog post last month, he wrote that the dollar’s reserve currency
status has lagged but may eventually catch up to declines in U.S.
competitiveness, trade and production.
Dalio was unavailable for comment.
A more immediate catalyst has been the decline in yields on U.S. government
debt. For years, the U.S. enjoyed higher yields than any other developed
country, boosting the dollar's allure.
That gap narrowed considerably after the Federal Reserve in March cut borrowing
costs to historic lows in response to the pandemic. The difference between
yields on U.S. 10-year Treasuries and German bunds, for example, stands at its
lowest level since 2014 - before the Fed embarked on a series of rate increases
to raise borrowing costs from their post-recession lows.
Graphic - Gap between U.S. and German 10-year government bond yields:
Some analysts are also worried the surge in U.S. government spending will
eventually spur inflation, hurting the U.S. currency’s buying power.
Goldman Sachs commodities research analysts recently wrote that the spending
could lead to problems for the dollar, especially if policymakers decided to let
inflation drift higher to pay down massive budget shortfalls even after economic
As a result, "real concerns around the longevity of the U.S. dollar as a reserve
currency have started to emerge," they wrote.
(Reporting by Saqib Iqbal Ahmed; Editing and additional reporting by Ira
Iosebashvili and Leslie Adler)
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