Foreign Currencies' Rise Will Not Wag the Dollar's Demise
AP Photo/Mark Lennihan, File
Foreign Currencies' Rise Will Not Wag the Dollar's Demise
AP Photo/Mark Lennihan, File
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Is doomsday finally here? For decades, pundits have warned the dollar’s days as the “global reserve currency” are numbered. They say losing it will render America’s ballooning debt unaffordable. Now they claim global greenback reserves’ hitting 25-year lows and China’s new digital yuan prove the end is nigh. So is it time to ditch your dollars before spiking interest rates spark a debt debacle? No. A slightly smaller slice of the global forex pie won’t dent the dollar’s status—which confers no material financial benefits anyway. Don’t fear other currencies’ rise. Cheer it.

Ever since 1944’s Bretton Woods system—pegging the dollar to gold and other currencies to the dollar—pundits and foreign politicians alike cried foul. In the 1960s, French Finance Minister Valery Giscard d’Estaing famously dubbed dollar dominance America’s “exorbitant privilege.” He claimed it juiced demand for US assets like Treasurys, letting America gorge on cheap debt while the passed-over, prudent world paid full freight. That view blossomed far and wide, outlasting the gold standard. Debt doomers have doubled down since 2008, sure everyone would ditch the doomed dollar. But those early warnings weren’t early; their foreseen “crisis” wasn’t magically averted. They were just dead wrong. 

The Dollar Doomers are right that the buck’s share of central bank reserves is down. In 2000, the dollar totaled  71% of disclosed forex reserves. Now? 59%. But that doesn’t mean China’s yuan—or any currency—will “dethrone” it. Absent from central bank balance sheets in 2000, the yuan presently composes a whopping 2.3% of global reserves. Its climb parallels Canada’s loonie and Australia’s aussie. They went from zilch in 2000 to 2.1% and 1.8% today, respectively. British Sterling has risen--from 2.8% to 4.7%, yet no one talks of it pounding the dollar. The euro is up from 18% in its early days to 21% now—though not without huge interim fluctuations around Europe’s debt crisis.

Pundits miss the lesson in these wiggles. They don’t signal America’s decline. They merely point to slowly rising confidence in other currencies. In a globalized world, that is good news. For global investors, it’s bullish!

Take China. As I told you on May 3, its Hong Kong and Taiwan policies get big attention. Yet markets care mostly about economic policy. China has undertaken many widely varied financial liberalizations this last decade, including allowing more market influence over exchange rates. Yes, much remains before the yuan fully floats like the euro or dollar. Until then it can’t come close to dominating global markets—digital or no. But loosening its peg was progress.

Meanwhile, the Euro wiggled wildly—central bank holdings reached 28% in 2009 before debt crisis fears zapped it to 19% in 2016. But its slight subsequent rebound—amid widespread Brexit worries—shows confidence in a Euro many long thought might never survive.

Further, pessimistic pundits miss the most crucial fact: Dollar demand is up. Total dollar holdings more than doubled since 2010, rising almost seven-fold since 2000. Last year they jumped 4.2%. How? Because overall forex reserves skyrocketed. Hence, the dollar simply comprises a slightly smaller piece of a hugely bigger pie. Dollar demand keeps rising because US Treasurys are the deepest, most liquid, trusted market. That is exactly why central banks crave it—not because talking heads deem it the “global reserve currency.” That depth, liquidity and relative trust won’t change markedly anytime soon.

And if the dollar’s share slips further? Good! Despite the blather, the US gets simply no financial reward from its “reserve currency” status. Yes, global transactions overwhelmingly involve the dollar. But neither Uncle Sam nor Americans themselves earn some cut or commission—not a penny.  That they do is myth.  Nor does reserve currency status generate lower financing costs. Consider bond yields. While America’s 10-year offers 1.6%, many eurozone members’ are negative. Germany’s 10-year trades at -0.21%. France’s sits at 0.17%. Neither has the alleged benefit of some “exorbitant privilege.” Japan pays merely 0.08% on its 10-year, despite the yen accounting for only 6% of global reserves. Its net debt-to-GDP ratio dwarfs America’s, 169% to 103%.

Yes, greenback dominance aids foreign policy. It gives US sanctions more bite by barring America’s naughty list from the global financial system. But that is a political benefit, not a  market edge—with no impact on US debt’s “affordability.” And that power isn’t evaporating anytime soon. All potential replacements for the buck that rogue nations could employ are light years from the liquidity, trust and depth needed for material impact. My advice: Find other things to fret about.

Instead, cheer the big unseen reality: More currencies gaining stability deepens liquidity and removes global trade friction—bullish worldwide! The dollar’s percentage of reserves may slip more ahead as other countries’ markets grow. Don’t follow panicky pundits who mistake that for America’s demise. Less dollar reliance simply means a broader, more stable global economy—just what investors everywhere should want. Welcome it.

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here


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