Will the U.S. dollar remain the world’s dominant currency? Washington and Wall Street are worried about ‘de-dollarization’ threat.
NEW YORK (April 21) A “de-dollarization” mania is gripping Washington and Wall Street.
Wall Street analysts, corporations, policy wonks and others are trying to ascertain whether there is any real threat to the U.S. dollar’s standing as the dominant global currency, along with how changes in the international monetary system might impact markets and the U.S. economy.
Interest in the topic, according to Mark Sobel, a longtime Treasury official and Chair of the Official Monetary and Financial Institutions Forum and others, is being driven by several developments, including the looming U.S. debt-ceiling battle in Congress, a China-brokered deal between Saudi Arabia and Iran as well as Beijing’s “no limits” partnership with Moscow, and growing unease abroad about Washington’s dominance over the global financial system.
“De-dollarization is one of the biggest things that our institutional clients are looking at,” said Jens Nordvig, a longtime currency-market strategist and founder of Exante data, which produces macroeconomic research for institutional clients, during a phone interview with MarketWatch.
Data show that the U.S. dollar’s share of foreign currency reserves at central banks around the world has been declining slowly since the late 1990s. According to the latest data from the International Monetary Fund, the dollar’s share of central bank reserves stands at 58.4%, down from roughly 70% in the late 1990s.
‘A stunning collapse’
However, one former Morgan Stanley economist believes this trend has been far more drastic than the IMF data suggest, in part because of the recent appreciation in the value of the dollar. Since January 2022, the ICE U.S. Dollar Index DXY, -0.13%, a closely watched gauge of the dollar’s value, has risen nearly 6%, according to FactSet data. It traded at 101.80 on Thursday, just above its lowest level in six weeks though.
“The [dollar] is losing its market share as a reserve currency at a much faster rate than is commonly believed,” said Stephen Jen, formerly of Morgan Stanley, and Joana Freire, in a research note sent to their Eurizon SLC Capital clients. In the note, Jen and Freire highlighted what they said were signs that the dollar’s decline had accelerated over the past year.
“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions,” Jen and Freire said, adding that these measures had “startled large reserve-holding countries.”
According to calculations from Jen and Freire, the dollar’s share of global reserves has declined by 11% since 2016 on this adjusted basis. Nordvig and others said that the IMF’s unadjusted data on central-bank reserves more accurately reflects the pace of the dollar’s decline as a share of reserve assets, seen as a critical barometer of a currency’s international standing.
MarketWatch
