The dollar has weakened. Here’s why it strengthens its role as the world’s reserve currency

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It doesn’t make much sense that the dollar is as widely used as it is. Of course, the US economy is the largest in the world, but the dollar is on one side of 88% of all currency trading, while the US accounts for about a quarter of the world’s gross domestic product. Countries, notably China and Russia, are also upset that the United States is able to exercise monetary dominance to sanction government officials around the world.

But even as the dollar has fallen 8.5% from March highs, according to the WSJ dollar BUXX index,
-0,17%,
there is still no clear path or even idea of ​​how to replace the role of the dollar in the global financial system. Just over a year ago, former Bank of England Governor Mark Carney suggested that Facebook’s Libra cryptocurrency could be a replacement, an idea that now looks ludicrous given the project’s difficulties. even though Carney’s critique of dollar hegemony has proven to be relevant in times of dollar shortages. at the start of the coronavirus pandemic.
Brad Setser, senior fellow at the Council on Foreign Relations, makes another point.
“A weaker dollar tends to lead to more intervention by countries seeking to protect their exports in the foreign exchange market, and therefore more accumulation of reserves,” he said in a blog post this week. “A weaker dollar therefore generally results in a higher rather than a lower demand for dollars on the part of global reserve managers.” And how do these reserve managers accumulate dollars? By buying US Treasuries, which comes in handy as the US is issuing debt at a rapid rate, as reinforced by the latest budget deficit figures released on Wednesday.

Setser claims that a number of countries returned to the market in June and July, actively working to depreciate their currencies – most notably Thailand, Taiwan, Singapore and India.
“Many export-oriented economies with large external surpluses are prepared to let their currencies fall against the dollar, but they remain reluctant to let their currencies appreciate against the dollar when the tide turns. And so, most of the global accumulation of dollar reserves has tended to occur when the market pushes the dollar down, not up, ”he writes.
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