Lately, headlines have been swirling with talk of the US dollar's demise. But I'd like to take a moment to remind you of a few critical reasons why the greenback remains the dominant force in global currency markets. Despite what you may have heard, the US dollar is alive and well, thriving on its stability, liquidity, safety, and convertibility. Let's look at a few key points that demonstrate the power of the USD and debunk those doom-and-gloom headlines.
A Leading Player in Foreign Exchange Reserves:
The US dollar is the heavyweight when it comes to central banks' foreign exchange reserves; in fact, it represents 58% of the total as of Q4 2022. This is more than double the combined holdings of the Euro, Pound, Yen, and Yuan[i].
As for the Chinese Yuan, which is often touted as the next big thing in currency, it only accounts for a meager 3%[ii] of foreign exchange reserves. They've got a long way to go.
Unrivaled Stability and Liquidity:
Consider this: if you're an investor anywhere in the world and you want to buy some of the best companies or assets (stocks/bonds), you'll need USD to make your purchases. This means that the world's most attractive assets are dollar-denominated, reinforcing the greenback's underlying demand and solidifying its position as a safe-haven currency.
Also, a whopping $7.5 trillion in currency is traded every single day, and 88% of that activity is with the USD[iii] as per Q4 2022 data. It’s unequivocal.
A Foundation of Economic and Political Strength:
The US stands tall with its stable institutions, independent central bank, sound policies, robust property rights, and reliable rule of law, all of which inspire global confidence in the dollar.
Meanwhile, the euro contends with fragmentation, and the Chinese yuan is hamstrung by Beijing's policies and lack of market openness. These issues are further compounded by political risks and instability.
Oh, and here's a fun fact: the Yuan is pegged to the USD for stability. So, the very currency that some people want to replace the dollar with actually relies on the greenback to maintain its stability. Read that one again! The Yuan is mostly seen as stable and ‘safe’ because the Chinese government fixes it to the USD.
In light of its commanding presence in foreign exchange reserves, stability, liquidity, and the US's economic and political bedrock, the I believe the US dollar's reign still remains unchallenged. While it's possible that the dollar could lose its dominance at some point, it would likely take years, if not decades, to unseat it. As of now, with no formidable challenger in sight and considering China's vulnerabilities and dependence on the USD, the greenback's vital role in the global economy stands as strong as ever.
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Gianluca Folino
Financial Advisor, Manulife Securities Incorporated
Life Insurance Advisor, Manulife Securities Insurance Inc.
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