The dollar: priority and harbinger of bad news – how true are the scenarios – Financial Times

The discussion about the destabilization of the dollar due to its dominant position in the global financial system has been ongoing for more than two decades and continues to occupy the public sphere today.

Doomsday proponents claim that the United States, like the Roman Empire before it, has become weak compared to other world powers. Geopolitical tensions were also added to the arguments. Sanctions imposed on Russia over its invasion of Ukraine by freezing its dollar reserves held abroad mean that many countries are looking to other safe havens for their capital.

Dollar: How the United States is working to undermine its hegemony – the absence of an alternative

Which countries have reduced their dollar reserves?

The Financial Times reported that a global effort – whether coordinated or uncoordinated – to devalue the dollar may occur. If carried out on a serious scale, it would deprive the United States of the privilege of issuing debt on its own terms, although other national authorities accept it. This would change the rules of the game in markets and trading. However, the evidence is limited to support an attempt to unpeg the US currency.

The share of dollar reserves held by central banks around the world has declined in recent decades. According to International Monetary Fund data, more than 65% of global reserves were in dollars. At the end of 2023, it decreased to 58.4%. In 2016, the corresponding ratio in Chinese renminbi was zero. However, at the end of 2023, 2.3% of global reserves were in RMB, an increase of 188%.

The Federal Reserve Bank of New York claims that the dollar’s decline is not due to a sluggish dollar globally. Instead, this shift is due to a small number of countries, including Switzerland, where a long attempt (lasting about a decade) to hold on to the franc led to a massive accumulation of the euro. “In fact, a rise in US dollar shares from 2015 to 2021 was a feature of 31 of the 55 countries for which estimates are available,” economists at the Federal Reserve Bank of New York wrote in late May. “The narrowing of the dollar option by a small group of countries – mainly China, India, Russia and Turkey – and the significant increase in the amount of reserves held by Switzerland explain most of the decline in the total share of dollar reserves.”

Switch to gold

Meanwhile, central banks around the world have increased their purchases of gold, in an apparent attempt to avoid the risks of sanctions, as gold is not controlled by any national authority. However, as the Federal Reserve Bank of New York points out, even after gold’s rapid accumulation in 2022 and 2023, the precious metal still represents a relatively modest 10% of total global reserves. He says narratives about falling dollar prices and the increasing role of gold “incorrectly generalize the actions of a small group of countries.”

However, gold holdings are expected to increase further. According to a survey of reserve managers conducted by the Official Monetary and Financial Institutions Forum (OMFIF), despite record high gold prices and the taming of global inflation, with gold often seen as a hedge, reserve managers are willing to increase reserves of the precious metal.

At the same time, demand for the dollar remains very strong. This survey does not record every country, but it covers 73 central banks, with total reserves of $5.4 trillion. dollar. 18% expect to increase their exposure to the dollar rather than reduce it, due to rising interest rates and the strength of the US economy. The euro is the next most popular currency, suggesting that reserve managers want to stick with larger, more liquid currencies.

The renminbi is less attractive

Meanwhile, appetite for the renminbi has “waned”, with 12% of managers looking to reduce their holdings of the Chinese currency, OMFIF researchers said. This is a big change in attitude. In 2021 and 2022, nearly a third sought to increase their RMB portfolios. This is partly due to relative pessimism about China’s near-term economic outlook, but the vast majority also cited market transparency and geopolitics as deterrent factors. “The research center report states.

“nothing lasts forever.” The article concludes FT. “It is not impossible to imagine, in light of the current political climate, a deterioration in the resilience of American institutions, which could ultimately pose a serious threat to the dollar’s ​​long-term position. But two decades ago it would have been too early to abolish the dollar’s ​​primacy in The global financial system, it is still too early now.