For about 20 years, we’ve been hearing the same story. The dollar is about to lose its status as the world’s reserve currency.The quantitative easing (QE) policy implemented by the Fed after 2008 was supposed to deal a fatal blow to the dollar. The U.S.’s years of high budget deficits were also set to dethrone it. Then came countries in the Global South that wanted to break free, and finally, oil-producing countries stopped pricing oil in dollars.
More recently, the dollar index fell toward 90 points in early 2021 and rallied in 2022 due to aggressive interest rate hikes by the Fed in an effort to curb inflation. The index exceeded 114 points in September 2022, a 20-year high.
The dollar corrected starting in 2023, closing out the previous year near 98 points. Currently, the U.S. currency index stands at 101 points.
This is not the behavior of a global reserve currency in decline. A currency can appreciate or depreciate against another currency without affecting its status as a global reserve currency. On the other hand, the pricing of oil contracts in dollars is declining, but this is not considered unusual as the world and the global economy are changing.
Of course, this does not mean that the dollar is not losing market share in global foreign exchange reserves. Its share has fallen to 57% from 70% twenty years ago. We learned relatively recently that central banks’ gold reserves have surpassed U.S. Treasury bonds in volume.
However, the second quarter was the worst quarter for gold in over 10 years, with the price falling below $4,000 per ounce. And this despite the fact that the geopolitical landscape and inflation were favorable for gold.
Clearly, what tips the scales in favor of the dollar is the depth of the U.S. capital market, its liquidity, its financial instruments, and, of course, the global investment community’s confidence that contracts will be honored. The architecture of the system, if you will.
No other market offers such advantages as the U.S. market. China has capital controls; few trust its judicial system; and the political authorities do not guarantee rights and freedoms.
It is no coincidence that other central banks have preferred to buy gold rather than the yuan for years.
In other words, the lack of an alternative to the dollar also helps perpetuate the U.S. currency’s hegemony and disprove predictions of its demise.
Of course, it’s not a good thing for a country to pay over $1 trillion annually in interest, as the U.S. does, since rising interest rates threaten the U.S. fiscal situation. It’s a difficult equation, one from which gold benefits.