A Decade On, Reserve Currency Doom Is Still Daffy

Is the end nigh? For decades, pundits warned the dollar’s days as the world’s primary reserve currency are numbered. Losing that status, they say, will render America’s enormous debt unaffordable. Now they claim global greenback reserves’ are hitting 25-year lows relative to other currencies and China’s new digital yuan proves trouble looms. It’s time to ditch your dollars before spiking interest rates spark an American debt implosion—right? Very wrong. A slowly shrinking slice of the global forex pie does nothing to dent the dollar’s status—which confers no real, material benefits to America’s finances anyway. You shouldn’t fear other currencies’ global rise—you should cheer it. Here is why.

Since 1958 brought the Bretton Woods system—pegging the dollar to gold and other global currencies to the dollar—pundits and foreign politicians alike have cried foul. In the 1960s, French Finance Minister Valery Giscard d’Estaing first famously dubbed dollar dominance America’s “exorbitant privilege.” He claimed it juiced demand for US Treasurys and other American assets, letting the US gorge itself on cheap debt while the passed-over, prudent world paid full freight. That misperception blossomed into a long life of its own, outlasting the gold standard. Debt doomers particularly latched on since 2008, worrying the world would surely bypass the buck soon. But those early warnings weren’t early and their foreseen “crisis” wasn’t magically averted. Those calls were just wrong. 

Yes, those fretting the dollar’s demise are right that the greenback’s share of central bank reserves has been declining—but not from some dollar rejection. In 2000, the dollar accounted for 71% of disclosed forex reserves. That figure is down to 59%. Canada’s loonie and Australia’s aussie account for part of the shift. Absent from other central bank balance sheets in 2000, they now sit at 2.1% and 1.8%, respectively. The euro is also up, from 18% in its early days to 21% now—though not without some big fluctuations around Europe’s mid-2010s debt crisis. The yuan? Up from zilch in 2000 to a whopping 2.3% today. British Sterling rose almost as much—from 2.8% to 4.7%.

Worrywarts see the dollar’s slight reserve slide percentage-wise wrongly. Rather than signaling America’s decline, it merely points to rising confidence in other global currencies. And that is good in a world increasingly demanding global trade. For global investors, it’s bullish!

Take China. Despite all you hear, much of which is correct relative to so many things, policymakers there undertook many financial liberalizations this last decade, including allowing much more market influence over exchange rates. Yes, a long road remains before the yuan floats like the euro or dollar. Until it becomes fully convertible it can’t come close to dominating global markets—digital or no. But loosening its peg was progress.

The euro, meanwhile, hasn’t exactly been steady Eddie—central bank holdings rose as high as 28% in 2009 before debt crisis fears zapped it to 19% in 2016. Its rebound since then, though—amid widespread Brexit worries—shows confidence in a currency many long thought might not even survive.

But beyond all that and more, what so many pessimistic pundits miss is this simple, basic fact: Demand for the dollar is up? not down. Total dollar holdings have more than doubled since 2010! Since 2000, they are up almost seven-fold. Just last year they jumped over 4%. How? Because the overall size of forex reserves has skyrocketed due to ever-growing global trade. Hence, the dollar is still in super strong demand—it simply has a slightly smaller piece of a hugely bigger pie today. Dollar demand keeps rising because US Treasurys are simply the deepest, most liquid, trusted market. That is why it is central banks’ most held currency—not because talking heads deem it the “global reserve currency.” That depth, liquidity and relative trust isn’t changing any time soon.

Instead of worrying over the dollar’s slightly and slowly slimmer slice of the quickly growing pie, currency doomers should wish for an even smaller piece. Why? I know that sounds strange, but the US gets simply nothing from its “reserve currency” status. Yes, the dollar is part of a huge amount of global transactions. But it isn’t as if Uncle Sam or Americans get some cut or commission on those deals. Nor does reserve currency status actually provide American lower financing costs. Consider the eurozone. Unlike the US, many of its members have negative bond yields. Germany’s 10-year trades at -0.25% while France’s 10-year sits at 0.09%—without the alleged benefit of some “exorbitant privilege.” Elsewhere, Japan pays a mere 0.06% on its 10-year, despite the yen accounting for only 6% of global reserves. That is despite the fact Japan’s net debt-to-GDP ratio dwarfs America’s, 169% to 103% while America grows faster than Japan on a steady basis.

What about the dollar’s central foreign-policy role in US sanctions? Yes, greenback dominance lends sanctions slightly more bite, restricting access to the global financial system to America targets. But that is a political benefit, not a huge market edge—and it has no bearing on US debt’s affordability. Regardless, that power won’t evaporate anytime soon, either. All potential replacements rogue nations could employ are light years from the liquidity, trust and depth needed. My advice: Find other things to fret.

Instead, cheer the unseen reality: More currencies gaining stability deepens liquidity and removes global trade friction—bullish worldwide! We should hope all these countries and their currencies keep improving fundamentally, increasing the liquidity and depth of their markets. It’s good for everyone. The dollar’s prominence may well keep slipping in coming years as other countries’ markets grow. Don’t follow panicky pundits who mistake that for America’s demise. Less global dollar reliance simply means a broader, more stable, growing world economy—just what global investors should want. Welcome it.