The US dollar still unrivaled as a global reserve currency against the yuan and the euro

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The weaker US dollar is expected to decline further, but its importance as a global reserve currency is not expected to decline, analysts say.The greenback benefited from investor safety amid the pandemic, which led to a three-and-a-half-year high in March.

But now strategists say the country’s economic recovery is in question, given its poor response to coronaviruses. The dollar had also reacted to the country’s rising deficit and the prospect of US interest rates staying lower for longer.

The dollar index fell to a 27-month low last week at 92.477, a steep drop from its 102 level in March. It has fluctuated since then, hovering between last week’s 92 and 93 levels. It was the last time at 93.150 on Monday.

“The economic outperformance of the United States relative to the euro zone and Japan (more) seems guaranteed, at least over the next few years, given the hesitant reaction of the virus. In addition, the new European Union stimulus fund of 750 billion euros gives more confidence to the euro as an alternative, ”said Patrik Schowitz of JPMorgan Asset Management in a recent memo.

The global multi-asset strategist added, “The reduction in its interest rate advantage makes the dollar less attractive and prompts investors to consider deposits in other currencies. These cyclical factors will not be hastily reversed and the US dollar may fall further. ”

The BlackRock Investment Institute also said the weakness in the dollar will persist in the near term, as the factors that led to the currency’s recent decline will continue to play a role.

“The prospect of the dollar retaining its perceived safe-haven status is another concern. We are assessing them as a controversial US presidential election looms, ”the BlackRock strategists wrote.

The fall of the dollar is “greatly exaggerated”

Analysts say, however, that recent fears that the dollar may lose its status as a global reserve currency are overblown.Senior economist at research firm Capital Economics, Jonas Goltermann, says discussions of the dollar’s fall are “greatly exaggerated.”

He said the dollar bears highlighted the greenback’s declining share in global foreign exchange reserves in recent years. According to data from the International Monetary Fund, the dollar’s share of total world reserves fell from 64.7% in the first quarter of 2017 to around 62% in the first quarter of 2020. In the last quarter of 2019, it hit a low by 60.9%.

Goltermann said, however, that the decline in the dollar index since March could be attributed to reasons other than the currency’s reserve status, including low interest rates and measures taken by Europe to stimulate the economy of the continent. The latter caused a “remarkable” shift towards the euro.

Since June, the dollar has lost around 6.6% against the euro.

In fact, Goltermann argues that the coronavirus crisis has “strengthened” the dollar’s role as a key global currency. He noted that the greenback surged as demand for safe-haven securities surged in March as the pandemic increased in the United States, Europe and elsewhere.

“Perhaps more importantly, there is no obvious alternative to the dollar,” Goltermann added. “The next two economies, the euro zone and China, are both smaller than the United States, and the euro (due to its still fragile political foundations) and the renminbi (due to Chinese capital controls and of the single political system) have shortcomings as reserve currencies. ”

Sven Schubert, Senior Investment Strategist at Europe-based Vontobel Asset Management, also named the yuan and the euro as the two most viable alternatives over the next decades. But they are not yet “serious competitors”, he said. Schubert added that around 50% of global trade contracts are still quoted in US dollars, while the country only accounts for around 12% of global trade.

“The depth of the US financial markets is unmatched, central banks still prefer to hold the majority of their reserves in USD, the world’s major commodities are traded in USD, and most global commercial contracts are quoted in USD and EUR,” Schubert said.

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