- The dollar’s dominance isn’t at risk, three currency experts told Insider.
- That’s because the greenback is an entrenched encumbent and widely trusted as a safe haven.
- Economists and currency experts shared five misconceptions about the dollar’s position in global markets.
The dollar’s dominance isn’t fading anytime soon, and commentators that have warned recently of a de-dollarized global economy are operating on a handful of key misconceptions, experts say.
There’s been growing talk that the dollar could soon be displaced by a rival currency, both as a reserve currency in central banks around the world, as well as the currency used in an overwhelming percentage of global trade.
But for the most part, those efforts aren’t amounting to much, and there’s very little chance the dollar will be toppled by a rival anytime soon, three economists told Insider.
They debunked five myths and misconceptions that are commonly touted by dollar doomsayers:
1. Central banks are rapidly shedding the dollar as a reserve currency
The dollar’s use as a global reserve currency has actually remained stable from year-to-year, and despite small slides in dollar reserves, the greenback is still by far the largest reserve currency among world central banks.
The US accounted for 54% of foreign exchange reserves in the fourth quarter of 2022, down slightly from 54.8% recorded in the fourth quarter 2021, according to data from the International Monetary Fund. Dollar reserves still dwarf the volume of all other reserve currencies, with the euro accounting for around 19% of reserves, and the Japanese yen accounting for just 5% in the fourth quarter of last year.
That’s because the dollar’s incumbency is simply very hard to displace, according to Bob Stark, the head of market strategy at Kyriba. Once a currency is recognized as a safe, countries will habitually choose that currency to hold unless there’s a seismic economic shift, he added.
“If you’re transacting something to millions or billions just as a organization, or if you’re looking to park your cash somewhere and want to it to be as resilient as possible, you’re probably going to choose the US dollar because it’s the least volatile of the currencies. That’s that,” Stark said.
2. The dollar is losing its stance as the top currency in global trade
This claim also isn’t supported by data. Of the 7.5 million currency transactions that occurred daily as April 2022, the US dollar accounted for at least one side in 6.6 million transactions, according to data from the Bank of International Settlements, meaning it has a role in 88% of all global trade.
That number has remained relatively stable for the past several decades — despite concentrated efforts by some nations to shun the dollar’s use, Jay Zagorsky, a markets professor at Boston University told Insider.
“For the last 35 years, the dollar share hasn’t changed,” Zagorsky said. “I think the amount of political rhetoric has heated up tremendously, but people’s actions haven’t changed.”
3. China’s yuan is the biggest threat to the dollar
The Chinese yuan has a minor role in the global economy, especially when compared to the greenback. The yuan accounted 2% of all foreign exchange reserves in the fourth quarter of last year, the IMF reported, and nearly a third of that is held by Russia, according to a 2022 IMF paper.
The yuan was also used in one side of just 7% of all foreign exchange transactions last year, BIS said.
China, for its part, has taken efforts to de-dollarize its economy, such as by securing agreements with other countries to transact in yuan, and selling billions of its own currency to Russia. But for the most part, that’s had a small effect on the overall dominance of the dollar in global markets, since efforts to de-dollarize are coming from countries with a smaller economy, Zagorsky said.
“Could I see the Chinese taking over from the greater British pound that Great Britain pound? Yes. And I see it maybe potentially taking over Japan. Yes. But it’s a pretty far jump to move from China all the way up to beating the euro, beating the US dollar,” he added.
4. The dollar could be rivaled by another currency soon
Even with de-dollarization efforts underway, it takes a long time for the dominance of a currency to end – again, because people are looking for a safe place to park their cash.
“Those relationships are only going to move the needle a very small amount,” Stark said referring to ties between China and its allies.
Though the percentage of dollar reserves has slipped, he estimates it would take around 24 years for global dollar reserves to drop another 12%. And even in that scenario, the greenback would still outpace reserves of all other currencies.
Perry Mehrling, an economics professor at Boston University, speculates that much of the anti-dollar talk today is spurred from discontent from other countries whose currencies are valued lower than the greenback, not because the dollar is actually at risk of being challenged anytime soon.
He pointed, for instance, to growing de-dollarization efforts after the western nations cut Russia off from the international financial communication system, SWIFT, which sparked fears that the dollar could be weaponized.
“This simmering discontent with being at the bottom of the international hierarchy of money gives [de-dollarization] a focal point,” he said. “Mostly, it doesn’t do much.”
5.The end of dollar dominance would be catastrophic for the US economy and stocks
The dollar being displaced by a rival currency probably wouldn’t have much impact on the US economy at all, the economists said.
According to Mehrling, the effects of de-dollarization largely take place on the balance sheets of foreign banks, which are largely disconnected from the US financial ecosystem.
“This isn’t directly connected to the pipeline to the United States,” he said. “It’s not like it can swamp the domestic system.”
A drop in the dollar could dissuade foreign institutions from investing in US Treasury bills and Treasury securities, but that would likely just mean the US economy would need to find a difference source of funding, Stark said. In terms of economic growth, he doesn’t think it would change very much.
That’s contrary to what commentators have implied, with Elon Musk calling the dollar’s decline a “serious issue.”
“You know, I don’t wanna insult Elon Musk,” Zagorsky said. “He’s into AI, he’s into solar power, he is into all these things. He might not be an expert on currency.”