Some current pundits in the financial sector are optimistic about the US dollar’s position as the world’s reserve currency.
For example, the recent Foreign Affairs piece It calls the dollar the “preferred currency” and “dominant”, even though it appears to be disrespectful of other currencies’ shares.
The dollar is the government’s preferred currency, accounting for about 60% of central bank reserves in the second half of 2022, compared to 20% for the euro and 6% for the yen. The pound, Chinese yuan, Canadian dollar and Australian dollar each account for less than 5% of government reserves.Dollar also prevails, To a lesser extent, in the private market.
Globally, remember what we are talking about Trillion of the “monetary unit” of a handful of countries. So even a 1% shift is worth 10 billion units per trillion. To put this into perspective, the global economy is currently worth about $100 trillion.
“There’s nothing here. Go ahead.”
Good things will continue eternallyright?
The US dollar has lost about 6% of its share of global reserves over the past decade ( chart).
I know what you are thinking: Look at that rebound from 2021!
yes, but that rebound is off the bottom decades low:
However, the increase is off the 26-year low at the end of 2021. Note that this does not include dollar-denominated assets on the Fed’s balance sheet, only dollar-denominated assets held by foreign central banks and foreign public institutions.
…foreign central banks and other foreign public institutions hold U.S. dollar-denominated assets such as government bonds, U.S. corporate bonds, and U.S. mortgage-backed securities.
why? The dollar is the default currency used to settle international transactions between countries that do not share a currency. When an Ecuadorian refinery orders parts from a German plant, they are usually billed in US dollars. And they pay in dollars. that is”world reserve currency” meaning.
Look at the chart again. After 2014, every time the dollar recovered a bit, it quickly returned to the downtrend.
Will it be the same this time? don’t know.What am i Do you know “Global reserve currency” status is appreciated and incredibly informative role – and many competitors are eager to usurp the throne.
Including the world’s second largest economy…
China’s efforts to undermine the dollar
The People’s Bank of China, which has built its economic strength through exports for decades, Estimated reserves of $3.4 trillionChina owns a significant amount of U.S. Treasuries in the form of government bonds and, in fact, largest international owner Number of US government IOUs since 2008.
of global times Recently, it was reported that China is shrinking its dollar holdings.They are pretty compelling case:
The reason why China has recently reduced its holdings of US Treasuries is mainly due to economic reasons.The problems of the US economy and the changes in bilateral economic and trade relations make China seek to diversify its foreign exchange reserves. The need is growing.
Now, this diversification effort has been (slowly) going since at least 2015. surpassed $1 trillion It’s been over ten years.
China is dumping the dollar, whether or not you believe the narrative about “changes in bilateral economic and trade relations.” slowly and steadily.
And they are not alone…
Global central banks increasingly seek dollar alternatives
If China is the only country steadily slashing its dollar reserves, we can easily make excuses.
Over the past two years, central banks around the world have historic change.
So who is dumping the dollar?
Russian search Certainly not in the dollar for stability after being blackballed from the global economy.
In February 2022, heavily sanctioned and isolated Russia had to find alternatives to dollar-denominated transactions. He wanted the new currency to have two characteristics. be relatively stable and minted by an unauthorized countryOf several eligible options such as the Indian Rupee and the South African Rand, only the Chinese Yuan was able to actively seek and take on an international role.
This is clear. A country that cannot legally trade in the United States is unlikely to be interested in the dollar.
Israel, historically the United States’ closest ally in the Middle East, throw a dollar:
The Bank of Israel has added four new currencies to its holdings, including the Chinese Yuan or Renminbi. for the first time in the history of the country, Bloomberg reported last week. The central bank will also reduce its US dollar and euro holdings to diversify its foreign exchange reserves, the report said.
Diversification “for the first time in the history of the country” is a big deal! why now?
The reason is the same for everyone!
Iraq’s central bank on February 22 announced plans for the first time to allow trade from China to be settled directly in yuan instead of US dollars to improve access to foreign currencies.
Mudir Salif, the government’s economic adviser, told Reuters on February 22 that “Iraq’s imports from China have been funded only in (US dollars), so it is unlikely that imports from China will be funded in renminbi.” It’s the first time,” he said.
These three countries were selected from a list containing: much more Countries dumping dollars like Japan, Switzerland, India, Hong Kong, Singapore, France… long list.
so let’s hear why Global central banks are less keen than ever to accept the dollar. Is it “changes in bilateral economic and trade relations” or more?
i have a theory.
Excerpt from Tim Barkerwho reviewed Paul Volcker’s 2018 book keep it and It explains my theory very succinctly.
…the US has unlinked the dollar and gold. Without the money supply supported by rare metals, The only guarantee of dollar health (hence its role as the world’s key currency) Effective anti-inflation policies. [emphasis added]
The last time inflation ravaged the US economy in the 1970s, nobody wanted dollars. After Volcker finally put an end to stagflation and ushered in a period of economic prosperity, the dollar’s share of global markets stabilized and began to recover.
I don’t think resurrection is possible. In the 1970s, There was no rational substitute for the dollar at all.
today? Both the renminbi and the euro could easily replace the dollar. Even the International Monetary Fund’s “special depositary right” (SDR) currency could replace the dollar overnight.
Now that we’ve established what’s happening, and perhaps why it’s happening, let’s ask another question…
What are the world’s central banks buying with the dollar?
global gold purchase
Why are central banks investing in gold?
Here is my theory.
Without a gold-backed dollar supply, that’s all Ensuring the integrity of the dollar effective anti-inflation policy.
That “effective anti-inflation policy” is now in tatters. Inflation has exceeded the Fed’s target of 2% in March 2021 and now. almost two years laterinflation is 3 times or more than the goals of the Federal Reserve.
The world’s central banks don’t want to be stuck with dollars losing value every month! Who can blame them?
Central banks know that physical gold is not the ideal way to pay for international transactions.It’s not the purpose – rather, it’s store of value You cannot depreciate on the press. You’ll notice that the word “diversification” also came up frequently in the discussion. Central banks, like us, want to diversify their reserves.
There’s a lot that central banks can do right now that you and I can’t do. But when it comes to diversifying our savings away from dollars and into safe assets that store value like physical gold and silver, we can follow them.
It doesn’t have to be a central bank. No need to build an underground vault. We don’t need a multi-billion dollar budget. Here at Birch Gold, we specialize in helping everyday American families diversify with physical precious metals. you To do what the world’s central banks are doing now.If you want to know more, you can easily start here.
Because if you don’t have an effective anti-inflationary policy, you probably want to diversify with gold.
peter reagan is a financial markets strategist at birch gold groupAs a precious metals IRA specialist, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ rating on BBB and has hundreds of satisfied customer reviews.
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