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The Dominance of the US Dollar in the Era of Rising Global Tensions

Can the US Dollar survive in its current role post-COVID and post-Trump?

Maximilian Magnacca Sancho
6 min readJun 19, 2020

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Many have predicted that the United States will fall away from its role as the economic hegemon and hub for global finance, trade and more. There is little argument that the world is moving towards a more multipolar geopolitical stance with the economic rise of China, the European Union finding its footing as evidenced by the new “geopolitical” commission, and Russia re-engaging with international issues and players. However, this geopolitical shift is not finding itself represented in the currency markets and the implicit economic power that is associated with them as seen in a recent BIS paper. In the era of President Trump and rising nationalist forces across the world, the shift away from the USD is still not happening, the international anchor of the USD has held and strengthened as individuals, firms and governments rushed to relative safety of a market they know and understand. In fact, it will most likely not take place in the near future until there becomes a viable alternative with deep, liquid capital markets backed up by an internationally recognised court system that operates solely under the rule of law. The US is still the only market that fulfils all of these requirements, though the Euro has appeared to be a likely contender ever since its creation, especially if a liquid safe asset is developed. The USD is still the currency that the majority of the world finds itself anchored too, from countries like Mexico to places like Hong Kong (see Map 1). Even when dealing with adversaries, the USD remains the currency to watch as demonstrated by how the Chinese government values the renminbi internationally when the People’s Bank of China sets the USD/CNY reference that market traders, China watchers, economists all use.

The continuation of being an anchor currency is most easily viewed in the dominance of the USD in official forex reserves held by countries around the world in the statistics compiled by the International Monetary Fund. 20 years ago, the USD was in a slightly stronger position being held at ~71% compared to its ~61% today, with the Euro being the largest benefactor of this downward trend, having gone from ~15% to peaking closer to 30% in 2009, to having settled at just around 20% currently. The runner-ups are held at such a low percentage that one would not be able to see any difference in the trends if imposed on the first chart. Therefore, for ease, I have created a second chart with the next 3 largest held currencies: the Japanese Yen, the British Pound Sterling, and the Swiss Franc. The Yen and the Pound Sterling are competing but are both around 5–6% of official forex reserves with the Swiss Franc below 1%.

The official forex reserves, of course, do not tell the whole story of the importance of a currency. The story, however, remains consistent in whatever aspect one looks. According to a study done by the Harvard economist Gita Gopinath, she has found that the USD still remains the dominant currency when looking at invoicing in currencies. This level of invoicing is vastly disproportionate to the amount of trade the United States does at a world aggregate level. The US accounts for approximately 10% of all imports and all export, however the amount of invoicing of either imports or exports done in the USD is closer to 50%. Therefore, 40% of all invoicing is coming from trade ex-the United States, which highlights the idea of the USD as a safe asset. The world trusts that the value will be what it says it is and that the US Government in all of its branches (looking at you Federal Reserve) will do what it needs to do to keep things rolling.

The level and size of the currency swaps recently launched in this latest crisis is also a good indicator of the global demand for the USD, and how crucial it is to the functioning of businesses across the world. The New York Fed is the branch responsible for the operation of the swap lines and using its data one can see the wide range of the central banks it has exchanged USD to. These include: the ECB, the Swiss National Bank, the Bank of Japan, the Bank of England, the Singaporean Monetary Authority, the Bank of Korea, the Reserve Bank of Australia, the National Bank of Denmark, the Norges Bank, and the Bank of Mexico. This number of swap lines is in contrast to those held by the ECB, the only other potential contender, who has swap lines with the National Bank of Romania, the Bulgarian National Bank, the Croatian National Bank, the Fed. It is clear by the different geographies, and just sheer number of swap lines created by the two central banks that the Federal Reserve plays a much larger role in international markets, with the USD being much more systematically important than the Euro and the ECB.

This trend is not challenged by the current crisis of COVID but rather it has been augmented. In the current “risky” macroenvironment, the United States, its dollar and its liquid markets are still the safest assets for the world. In these types of risk-off events, flows of financial capital head to the US and this was the prevalent view pre-COVID with Nordea, the nordic bank, publishing a note when the world was simpler saying…

“The break of 7.00 in USD/CNY in the wake of the re-escalated trade war is a symptom of continued limited risk appetite on FIC markets, and we see limited reasons why this should change during H2 2019. USD liquidity will continue to shrink for another few months, while we still see high risks of further tariff escalations from Trump in the remainder of 2019. We revise our already dovish rates forecasts even lower and expect the USD to remain stronger for longer as a consequence.”

Post-COVID, with the economic fallout being felt globally with decreased liquidity due to the lockdowns and more, risk appetites have been weaker leading to strong USD and larger demands for the USD as is seen by the amount of swap lines launched by the Fed. This crisis hasn’t given the fire test to any other currency, thus leaving the USD still supreme.

It was not challenged with the election of President Trump who campaigned on a protectionist, insular economic platform, which arguably increased the riskiness of the United States. Furthermore, it has not been challenged throughout his presidency in whatever action he undertook, such as the trade war he launched with China. This is qualitative evidence that the role of the United States as an economic hub and safe haven for the world’s wealthy is strong enough to withstand the various attacks on its institutions it has suffered both internally and externally. The USD has survived an attack from another ascending power, the European Union and the creation of its euro. It will survive the ongoing era of global tensions with China, Russia and others, as well as survive the turmoil brought on by COVID. It will do all of this while remaining dominant for now.

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Maximilian Magnacca Sancho

An economist with musings on interesting parts of economic history/society from the past to the present. Book reviews | Economic History | Current Events