Tuesday, April 23, 2024

The dominance of the dollar and the struggle for second place | Jimmy McGyver


Jimmy McGuire *

“Is the future of the US dollar over and its global dominance over?” These are the views of two leading global experts on foreign exchange reserves and global capital inflows that emerged in the recent Brookings Institution panel discussion on
Experts agree that the dollar’s foreign exchange reserves are better protected from changes in technology, trade, and global geopolitics than the key role of billing currency, exchange mechanisms, or the unit of account.
In short, there is still no viable alternative to US capital markets for reserve managers who want a safe haven and liquidity for their funds while generating relatively large and stable returns.
“What we see is that the war for second place could intensify, while the dollar will dominate,” said Easwar Prasad, a professor at Cornell University. “That would be my view,” Eisengreen, a professor at the University of California, told Reuters after the panel discussion, but reiterated his expectations that the dollar’s dominance would gradually erode over time.
According to the International Monetary Fund, global foreign exchange reserves stood at $ 12.9 trillion at the end of last year, of which $ 12 trillion is known by the monetary system. The share of the US dollar was 58.8%, the lowest level in 20 years, up from 70% two decades ago. In contrast, the share of the euro was about 20%, and it has not changed much from what it was two decades ago.
In an article he co-authored in March entitled “The Hidden Erosion of the Dollar Dominance: The Rise of Active Alternatives and the Rise of Unusual Reserve Currencies,” Eisengreen found that a quarter of the dollar’s decline over the past 20 years has been spent. The Chinese yuan and the rest are for unusual reserve currencies such as the Swiss Franc, Canadian and Australian Dollars and the South Korean Von. Data indicate that these currencies now take up more of a share of the euro than the dollar.
Consider this, a decade ago, the dollar reserves were 60%, the same as last year. Shares of the euro hit a record high of 28% in 2009, before the euro crisis and the European Central Bank’s negative interest rates and stimulus to buy securities.
Last year, the total share of non-traditional currencies, including the renminbi (yuan), was about 10% of global reserves, or $ 1.2 trillion. But most of it has accumulated over the past decade, during which time the euro’s share has plummeted.
Eisenhower said the increase in total reserves of these currencies reflects the smart management of the investment portfolio. With the exception of the renminbi, these currencies are attractive from a risk-reward perspective, and their central banks can easily trade with each other by obtaining dollar exchange taxes from the US Federal Reserve in times of crisis or emergency.
The Brookings Institution panel, including Washington and its allies, froze Russia’s international reserves, citing reasons why countries are worried about an increase in the value of the renminbi or the Chinese yuan, and why China does not want to raise the exchange rate. Will bring.
As always, what Beijing does or does not do with its $ 3.2 trillion reserves, valued at $ 60 percent of its assets, has provoked intense debate. Although China and the United States are in a “slow economic divorce”, according to Goldman Sachs teammate Zack Bundle, China is primarily embroiled in a cash crunch.
Prasad points out that even if China plans to convert even a small portion of its dollar reserves into euros, yen or Swiss francs, inflows will be high enough to lead to a sharp rise in exports of these currencies.
As the eurozone, Japan and Switzerland are more open economies than the United States, their central banks tend to buy dollar-denominated foreign exchange reserves to ease the upward pressure on their currencies. It will oppose diversification in China and the dollar reserve could rise anyway. Again, the source of safe and liquid assets is in the United States. Here, Prasad said, “If you want to find a place where you can save hundreds of billions or trillions of daily reserves, you can go nowhere but dollars.”

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* Writer (Reuters)

Nadia Barnett
Nadia Barnett
"Award-winning beer geek. Extreme coffeeaholic. Introvert. Avid travel specialist. Hipster-friendly communicator."

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