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Worry about the dollar has risen with the arrival of the pandemic
The share of central bank reserves in dollars fell to 59%.
In recent years, the role of the US dollar in the global economy has become less and less important. During the fourth quarter of 2020, the share of dollar reserves held by central banks fell to 59%, the lowest level in 25 years, according to the IMF. The share of "green" will continue to decline, as developing countries seek to further diversify the currency composition of their reserves.
Talk about a diminishing role for the dollar and its possible loss of its status as a world reserve currency intensified with the arrival of the pandemic. Experts are increasingly criticizing the American central bank's response to the economic consequences of the epidemic.
For example, Goldman Sachs analysts explain their concern about the fate of the "green" by massive cash infusions of the FRS into the economy, as well as the refusal to curb inflation. Thus, the Fed said it would tolerate inflation at around 2%. As you know, inflation reduces the interest paid on bonds, which makes them less attractive to investors.
Stan Druckenmiller believes that the dollar may lose its reserve currency status.
Legendary investor Stan Druckenmiller is among those criticizing the Fed's policies. In particular, he considers the decision to purchase $ 40 billion of mortgage bonds a month unsuccessful, despite the fact that the housing market is developing rapidly and the supply is limited; on the purchase of $ 80 billion monthly in Treasury portfolios, despite the fact that the economy is growing at a fast pace.
In addition, the purchase of Treasury securities, he continues, is giving Congress the green light to launch yet another multi-million dollar spending program. Such a position at this stage of economic recovery is toxic and leads to a huge burden on public debt servicing. This, according to Druckenmiller, will eventually lead to the devaluation of the dollar and the loss of its status as the world's reserve currency.
The dollar's status as a reserve currency brings certain benefits to the United States. Strong demand from investors around the world to own dollar-denominated assets such as Treasury bonds allows the US to borrow from other countries at lower rates. Therefore, a decrease in demand for dollars will raise the cost of borrowing. However, the vast majority of the world's financial markets - in particular, commodities such as oil, gold, base metals and agricultural products - are valued in dollars. Thus, American investors, businesses and even the government are significantly less exposed to foreign exchange risks than entities in other countries.
The yuan may become the third reserve currency.
If the dollar loses its status as the world's reserve currency, interest rates are likely to rise and this could limit government borrowing. This, along with rising inflation, will drive up costs for consumers and businesses, such as higher prices for cell phones, housing, new construction, and overseas vacations.
In light of the declining role of the dollar, analysts are talking about the growing role of the yuan. In its report, Morgan Stanley predicts that by 2030 the yuan could grow from about 2% of the world's foreign exchange reserve assets to 5-10%. This means it could outperform the yen and the pound, becoming the world's third largest reserve currency after the euro. Such a prediction does not seem unrealistic given the growing volume of cross-border transactions in China, denominated in yuan.
In general, the collapse of the dollar remains unlikely, since the same China, as well as another world exporter - Japan, consider the United States to be too important a customer. And even if the United States had to declare a default on some debt obligations, it is highly doubtful that the world would have allowed the dollar to collapse dramatically, with all the ensuing consequences.
The share of central bank reserves in dollars fell to 59%.
In recent years, the role of the US dollar in the global economy has become less and less important. During the fourth quarter of 2020, the share of dollar reserves held by central banks fell to 59%, the lowest level in 25 years, according to the IMF. The share of "green" will continue to decline, as developing countries seek to further diversify the currency composition of their reserves.
Talk about a diminishing role for the dollar and its possible loss of its status as a world reserve currency intensified with the arrival of the pandemic. Experts are increasingly criticizing the American central bank's response to the economic consequences of the epidemic.
For example, Goldman Sachs analysts explain their concern about the fate of the "green" by massive cash infusions of the FRS into the economy, as well as the refusal to curb inflation. Thus, the Fed said it would tolerate inflation at around 2%. As you know, inflation reduces the interest paid on bonds, which makes them less attractive to investors.
Stan Druckenmiller believes that the dollar may lose its reserve currency status.
Legendary investor Stan Druckenmiller is among those criticizing the Fed's policies. In particular, he considers the decision to purchase $ 40 billion of mortgage bonds a month unsuccessful, despite the fact that the housing market is developing rapidly and the supply is limited; on the purchase of $ 80 billion monthly in Treasury portfolios, despite the fact that the economy is growing at a fast pace.
In addition, the purchase of Treasury securities, he continues, is giving Congress the green light to launch yet another multi-million dollar spending program. Such a position at this stage of economic recovery is toxic and leads to a huge burden on public debt servicing. This, according to Druckenmiller, will eventually lead to the devaluation of the dollar and the loss of its status as the world's reserve currency.
The dollar's status as a reserve currency brings certain benefits to the United States. Strong demand from investors around the world to own dollar-denominated assets such as Treasury bonds allows the US to borrow from other countries at lower rates. Therefore, a decrease in demand for dollars will raise the cost of borrowing. However, the vast majority of the world's financial markets - in particular, commodities such as oil, gold, base metals and agricultural products - are valued in dollars. Thus, American investors, businesses and even the government are significantly less exposed to foreign exchange risks than entities in other countries.
The yuan may become the third reserve currency.
If the dollar loses its status as the world's reserve currency, interest rates are likely to rise and this could limit government borrowing. This, along with rising inflation, will drive up costs for consumers and businesses, such as higher prices for cell phones, housing, new construction, and overseas vacations.
In light of the declining role of the dollar, analysts are talking about the growing role of the yuan. In its report, Morgan Stanley predicts that by 2030 the yuan could grow from about 2% of the world's foreign exchange reserve assets to 5-10%. This means it could outperform the yen and the pound, becoming the world's third largest reserve currency after the euro. Such a prediction does not seem unrealistic given the growing volume of cross-border transactions in China, denominated in yuan.
In general, the collapse of the dollar remains unlikely, since the same China, as well as another world exporter - Japan, consider the United States to be too important a customer. And even if the United States had to declare a default on some debt obligations, it is highly doubtful that the world would have allowed the dollar to collapse dramatically, with all the ensuing consequences.
