The US dollar will almost certainly remain the world’s most important reserve currency for the foreseeable future but the lack of a ready substitute does not mean the dollar’s current position is entirely assured, says Fitch Ratings in its latest Global Perspectives commentary.
No other currency offers the same set of advantages to money managers, including central banks, or is as deeply embedded in the global financial system. Crucially, the dollar is underpinned by the fact that the US Treasury market is the world’s largest and most liquid for risk-free assets, and the Federal Reserve operates independently of government with respect to the market, and in implementing policy more broadly.
Calls for the dollar’s displacement were relatively infrequent – although not entirely absent – when US monetary policy was exceptionally accommodative in the aftermath of the global financial crisis. That changed in mid-2013 when the Federal Reserve announced it would begin to slow its asset purchases, causing considerable turmoil in emerging markets (the “taper tantrum”) and appeals to the Fed for greater consideration to be given to the international implications of its policy decisions. The Fed now appears poised not only to continue with policy interest rate hikes that began in December 2015, but to also consider the pace and magnitude of eventual balance-sheet reductions.
Perhaps the most plausible scenario for the dollar being meaningfully displaced does not begin with the emergence of a viable alternative, but rather it being undermined at home.
This post was published at Zero Hedge on May 31, 2017.
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