By: Ignacio Barros
The US dollar has been under the microscope for the last year due to rumors about its (alleged) declining leadership in the hierarchy of global reserve currencies.
Recent collaborations between China, Russia and the other BRICS countries, combined with rising tensions between those powers and the US, have raised concerns that the dollar could see its dominance lessen in the coming years.
One not surprising example comes from Russia, where in the past two months the Chinese yuan has surpassed the dollar as the country’s most traded currency. In that case, the move makes sense given Russia’s growing status as a pariah state, but it nonetheless shows an effort, albeit incipient, to unseat the dollar as the dominant force in world trade.
But for the strategists at Carson Group, a scenario in which the dollar is not the world’s primary reserve currency is simply not on the table any time soon.
“The dominant role of the dollar will not end anytime soon simply because there is no good replacement,” the firm’s global strategist Sonu Varghese wrote in a research note last week.
The Carson Group listed three reasons why the dollar will remain resilient:
- The world has confidence in the US and therefore in the US dollar
- The dominance of the dollar is hegemonic in international trade and finance
- The United States is willing and able to run large trade deficits.
Let’s look at this third point in detail.
Last year (2022), Americans bought the world $3.3 trillion worth of products, while only selling $2.1 trillion to it. That is, the United States incurred a trade deficit of USD 1.2 trillion. And he has no problem with that. Why?
The deficit, apparently against US interests, leaves foreign buyers with a lot of dollars they need to put somewhere. Foreigners turn around and buy the safest and most liquid securities in the world. Which are? American Treasury bonds. And those who don’t buy bonds keep their dollar reserves in cash. On the other hand, greenbacks are liabilities that the US government is more than willing to issue to maintain that appetite for its currency, which gives it immense power and influence.
No other country, including the Eurozone as a bloc, seems remotely capable or willing to generate, support and manage a demand for foreign exchange of this magnitude in the near future.
Sources:
- Why the dollar’s dominant? – (insider.com, April 2023)
- Is the dollar’s dominance under attack? – (NY Times, February 2023)
- carsongroup.com