In an unfolding saga, Joe Biden is challenging the supremacy of the US dollar in global finance. This unique combination of domestic and foreign policies is threatening the dollar’s longstanding position as the world’s reserve currency, raising concerns about the consequences for Americans if this reign comes to an end.
- The Trigger for Dollars Exodus:
- Foreigners are fleeing US dollar assets due to the use of financial sanctions.
- If global demand for US dollars diminishes for trade, central bank reserves, private wealth funds, and as the official currency in several countries, there will be a massive influx of dollars back into the US market.
- This flood of dollars will lead to intense competition for goods and services, exacerbating inflation to unprecedented levels.
- The Data:
Figure 1: Revealing the decline in USD share of total reserves and the implications.
- The shift in dollar share is significant, but it also highlights a faster shift during the Trump administration.
- Contextualizing the data is crucial to understanding the dynamics at play.
Figure 2: Unveiling the share of foreign exchange reserves held by central banks across various currencies.
– The decrease in the US dollar’s value affecting the overall shares calculated using market exchange rates.
– Premature concerns about the end of the dollar’s reserve currency hegemony given the fluctuating values.
- The Impact of Sanctions:
- Uncertainty surrounds the claim that sanctions led to a decline in dollar holdings.
- Ongoing research aims to determine the impact of the 2022 sanctions imposed in response to Russia’s actions in Ukraine.
- Despite the sanctions, the US dollar has appreciated in real terms, adding complexity to the narrative.
As the narrative unfolds, the future of the US dollar’s dominance hangs in the balance, with implications that extend beyond financial markets. Understanding the complexities of this transition is vital for both policymakers and individuals as they navigate the evolving landscape of global finance.
