{"id":2600,"date":"2023-04-19T19:00:00","date_gmt":"2023-04-20T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/is-the-us-dollar-still-a-viable-reserve-currency\/"},"modified":"2024-02-05T09:29:20","modified_gmt":"2024-02-05T14:29:20","slug":"is-the-us-dollar-still-a-viable-reserve-currency","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/is-the-us-dollar-still-a-viable-reserve-currency","title":{"rendered":"Is the U.S. dollar still a viable reserve currency?"},"content":{"rendered":"\n

By Atul Bhatia, CFA<\/strong><\/p>\n\n\n\n

The financial press has been full of headlines lately on the death of the U.S. dollar as a reserve currency. While we think this view is wrong\u2014or at least so premature as to be indistinguishable from being wrong\u2014we think equally damning is that the predicted dramatic falls in U.S. asset prices are likely pure hyperbole. <\/p>\n\n\n\n

The reality is that currency changes are just one component of a complicated macroeconomic backdrop, and we believe the migration toward a global multicurrency reserves position will ultimately prove to be just as boring as it sounds. <\/p>\n\n\n\n

Reserve impact<\/h2>\n\n\n\n

Currency reserves are held by central banks and foreign institutions for several reasons, but primarily to provide stability and to purchase key imports during periods of domestic or global economic crisis. For decades, the U.S. dollar has been the currency of choice for reserves\u2014to the tune of roughly US$7 trillion. <\/p>\n\n\n\n

Despite the name, we think the real benefit to a country of having reserve currency status has little to do with foreign exchange\u2014a stronger U.S. dollar tends to help inflation by making imports cheaper and to hurt exporters by making it tougher to sell goods abroad. However, both effects are generally minor. <\/p>\n\n\n\n

Instead, the greenback\u2019s reserve status has had the largest impact by providing funding for the U.S. government. Dollar reserves are almost always held in U.S. Treasury or agency bonds, highly liquid securities that tend to perform well as global economic risks mount, making the investment particularly valuable precisely when reserves are needed. As a result, foreign demand for dollar reserves has created concurrent demand for U.S. government debt. <\/p>\n\n\n\n

Slowly at first, then more slowly<\/h2>\n\n\n\n

Where the recent commentary goes wrong, in our view, is in confusing what economists refer to as stocks and flows. Because of reserve holdings, foreign institutions are sitting on US$7 trillion in Treasuries. A rapid unwinding of that stock of bonds would be negative, but it\u2019s also incredibly unlikely, as we discuss below. <\/p>\n\n\n\n

The more likely path for de-dollarization in reserves is through redirecting the flows of newly created reserves. This process has already begun. The greenback is now about 58 percent of global reserves compared to nearly 73 percent in 2001. Critically, the reallocation came through changes in new investment flows, not by selling the stock of existing positions. We see that trend continuing. <\/p>\n\n\n\n

If that happens, we would expect to see slightly reduced demand for U.S. bonds at future Treasury auctions, potentially pressuring yields upward. But impacts are likely to be small. Overseas investors have bought just under 17 percent of Treasury notes and bonds issued in 2023, a quantity easily replaceable with existing demand, as auction orders routinely double the bond offering size. Publicly available data does not allow us to calculate the yield impact with precision, but we feel confident saying it would be a matter of basis points, not percentages, and easily manageable for the U.S. economy. <\/p>\n\n\n\n

Yields fall alongside dollar\u2019s reserves dominance<\/h3>\n\n\n\n

Reserve buyers just one factor in complicated pricing mosaic<\/h4>\n\n\n\n
\"Percentage

Line chart showing the U.S. dollar declining from 72% of global reserves to 58% between December 2000 and December 2022. During the same period, 10-year Treasury yields fell to 3.88% from 4.92%. <\/p>