Recent headlines have some people worried about the dominance of the U.S. dollar and where the U.S. dollar stands as a reserve currency.
A variety of economic factors can contribute to depreciating the U.S. dollar. These include monetary policy, rising prices or inflation, demand for currency, economic growth, and export prices.
Since one of our core values at One Life Financial Group is to “embrace the evidence,” we wanted to look at the data behind some of these “currency concern claims” about the U.S. dollar you may have seen in the headlines.
As you can see in this report, the U.S. dollar continues to hold a big lead in the share of global reserves, and the gap between the share of USD and EUR, the second most-used reserve currency in the world, has also seen little change over these 20 years (40% on average) (Both shown in Figure 1).
I find little evidence in this chart that any currency has gained meaningful ground on the USD over the last 20 years, which leads me to believe that we are far from seeing the USD surpassed as the leading reserve currency.
Next, Figure 2 demonstrates that periods of decline in the share of global reserves might not necessarily mean that currency will depreciate against other major currencies. During the period following the Global Financial Crisis (2010-2022), when the USD slightly lost its share of global reserves, it also strengthened by more than 30% versus the euro and more than 20% versus a basket of other leading foreign currencies.
Figure 4 shows the index results over the 20 years ending in 2020. The consistency of the USD’s usage over other currencies is clear. While the index has yet to capture the last few years, data from Figures 1 and 3, representing 50% of the index’s scoring methodology, offers no reason for us to expect a significantly different picture today.
Finally, it’s also worth mentioning that the U.S. dollar is coming off its best year in two decades, pushed up more than 12% by the Federal Reserve’s interest-rate hikes aimed at trying to tame persistent inflation.
From the data examined, we have observed a slight decline in the USD’s share of global foreign exchange reserves over the last 20 years, but the dollar remains the world’s preferred reserve currency.
Further, the data supports that a decline in the share of reserves doesn’t necessarily mean that currency will depreciate. When we look at broader usage measures, there’s still no question that the USD continues to be the most heavily used currency in the world.
While nobody can predict the future, I think the dollar’s role in the global economy remains unrivaled.
If you’ve been worried or anxious about these recent scary headlines about the dollar, I hope this helps quell your fears. If, after reading this, you’re still worried, don’t hesitate to pick up the phone to call your advisor or to schedule an initial consult with One Life if you would like to create a plan that can help you secure your future even during difficult times. Our 90-minute consultation is always at no cost to you!
Disclaimer: All written content is for information purposes only. Opinions expressed herein are solely those of One Life Financial Group Inc. and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered through One Life Financial Group, Inc., an Investment Advisor in the State of Minnesota.