The Verdict Signed: Dollar Deprived of Status of World Reserve Currency
WASHINGTON - February 22, 2019
The dollar’s world dominance is coming to an end — it will lose its status as the main reserve currency in the coming years, the Federal Reserve System has recognized. The largest investors agree with this. Now the situation is complicated by the fact that Fed and leading financiers are ready to sign a dollar sentence.
All is worse than it looks.
The US currency retains a key role in international trade, but every year there are more factors playing against the dollar. And very soon its world domination will end, experts say. This forecast is contained in the Liberty Street Economics resource owned by the Federal Reserve Bank of New York (a key bank in the Federal Reserve System).
Collapses in the US stock market occur with frightening regularity and it affects the markets of other countries. With each such collapse, calls to reform the international monetary system and to find an alternative to the dollar become louder.
In particular, it is proposed to use the virtual currency of the International Monetary Fund that is the so-called special drawing rights (SDRs). Now SDRs are intended for calculations within the framework of the IMF. In addition, a dozen and a half international and regional organizations use SDRs as a unit of account in setting prices and tariffs.
The idea to create a new world currency on SDR basis was made by China in 2009. As the world economy recovered from the global crisis, the proposal lost its relevance, but the situation changed dramatically with the outbreak of trade wars.
Experts continue to argue about whether this synthetic currency can become a full-fledged replacement for the dollar, and the central banks of different countries, meanwhile, take quite specific steps that actually close the door to the US currency: to reduce the share of the dollar in international reserves.
Thus, the Central Bank of Russia by the end of 2018 June reduced the share of the dollar in foreign exchange reserves by more than two times: from 46 to 22%. A fifth of the gold reserves--about $100 billion--was transferred to the euro and yuan.
China, India, and Turkey are doing the same, with the intention to limit the use of the US currency in the calculations announced by the European Union.
Analysts believe that the central banks, which now hold most of the reserves in dollars, will increasingly get rid of the US currency. In the second quarter of last year, the Euro's share of global reserves rose to 20.26%, the highest since the fourth quarter of 2014. And it threatens America with big problems.
"The current status of the dollar as the main reserve currency allows us to isolate the US economy from external shocks," said Linda Goldberg, Vice President of the New York Fed. "The loss of currency dominant role in world markets will have negative consequences — primarily for the issuer, that is, the United States."
Years of falling or sudden collapse
At first glance, there is little threat to the dollar now. As the well-known financier of the US dollar, Ulf Lindahl, head of the Foreign Exchange Market Research Association, recalled, the US dollar broke the historical record. Relative to other key currencies, it has reached the highest level in the last thirty years.
However, according to Lindahl, soon the picture will change: The dollar is entering a long-term period of downtrend. According to the financier, in the next five years, the US currency will depreciate against the Euro by 40%.
As analysts of the US investment Bank JPMorgan Chase calculated earlier, the decline will begin by the end of 2019, and the dollar will not be able to reverse this trend.
"In the end, we are waiting for the fall of the dollar for many years. In the second half of next year, we will witness the weakening of the US currency," JP Morgan analysts said in December.
Moreover, according to some experts, a smooth decline is not necessary.
Ray Dalio, the founder of the world's largest hedge fund Bridgewater Associates, is confident that at some point the dollar will simply collapse, unable to withstand the severity of the "triple deficit" in the us economy: budget deficit, trade balance, and current account.
The triple deficit will scare foreign buyers away from US government bonds, which will provoke an explosive growth in their yield and a collapse in the dollar at least 30%. In this case, the dollar will inevitably lose its status as a world reserve currency, and very quickly.