us dollar

US dollar remains world’s currency of choice despite slide

US currency slides as coronavirus batters economy
US currency faces few challengers

The US dollar’s slide during the coronavirus crisis has provoked much angst about the future of the currency.

Some have argued that its roughly 6 per cent drop on a trade-weighted basis since April is just the start of a much sharper collapse in the currency’s value, one akin to the 1970s and 1980s when it fell more than 30 per cent. Others have made a bolder claim: the dollar’s status as the world’s reserve currency is in peril.

But according to Adam Slater, lead economist at Oxford Economics, such fears are overblown. Not only is further depreciation likely to be limited, but the currency’s standing as the world’s currency of choice is secure.

“There have been quite a lot of dollar corrections over the last 20 years or so, and it seems like almost every time this happens we get the same stories [asking] if this could be the beginning of the end of the dollar,” said Mr Slater. “But the facts refuse to change on the ground.”

The events of March underscore this point. During this period of extreme volatility, all anyone wanted to hold was the buck. “When you get financial stress globally and risk aversion globally, people move into dollar assets,” said Mr Slater.

As coronavirus cases surge again and the threat of renewed lockdowns looms large, there is ample reason for investors to continue seeking out safety.

Moreover, on many metrics, the dollar faces few rivals. Whether in terms of its use in cross-border payments or its share of foreign exchange reserves held by global central banks, the dollar’s dominance is sweeping. Meanwhile, IMF data show the euro’s share of reserves flatlining around 20 per cent.

Further dollar weakness could reinforce this dynamic. According to Brad Setser, senior fellow at the Council on Foreign Relations, a US think-tank, export-heavy Asian economies tend to intervene in markets under these circumstances to prevent their currencies from appreciating. What results is more reserve accumulation by these central banks, not less.

“A weaker dollar thus typically results in higher not lower demand for dollars from the world’s reserve managers,” he said.

Credit: Source

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