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Bottom line
The dollar’s global dominance should be assessed along two distinct lines: reserve and international currency status. Adjusting for exchange rate (price) changes, the dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions. While it is well understood that the dollar had, for close to 20 years, suffered a quiet erosion in its reserve currency status, in 2022, the dollar’s share in global reserves – in real terms – collapsed at 10 times the average speed. Global reserve managers sold a lot of dollars in 2022 when the dollar rallied. The prevailing view of ‘nothing-to-see-here’ on the USD as a reserve currency seems too innocuous and complacent. Having said this, the dollar still enjoys substantial network advantages as an international currency, mainly because of its huge, liquid, and reasonably well-functioning financial markets. The persistence of these preconditions, however, is not preordained. If the US makes more policy errors and abandons the culture of self-examination, there will likely come a time when much of the rest of the world will actively avoid using the dollar. Finally, what needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.
