Joe Biden drops the King Dollar in real time. The US dollar’s monetary dominance is under siege from a uniquely bad combination of foreign and domestic policies, and Americans should be very concerned about the fallout if the dollar loses its 80-year reign as the world’s reserve currency.
That’s from an article by EJ Antoni and Peter St. Onge, back in March 2023. The use of financial sanctions is causing foreigners to flee US dollar assets. The result?
If the people of other countries no longer want trade, big banks, private wealth funds, and official money of about ten countries, all those dollars have nowhere to go except to return to us in a flood that our country has never seen. This flood will compete for US goods and services against dollars already here as decades of accumulated trade deficits come flooding back all at once.
At that point, hyperinflation would not be hyperbole
OK. Time for some data.
Figure 1: USD share of total reserves as reported (light blue), and USD share plus 60% of unallocated share (bright blue). Source: IMF, COFER, and author’s calculations.
While this reduction in the share of the dollar may appear to be monetary, it is interesting to note that the most rapid change was during the Trump administration. In any case, some context is useful.
Figure 2: Share of foreign exchange funds held by central banks, in USD (blue), EUR (orange), DEM (tan squares), JPY (green), GBP (sky blue), Swiss francs (purple), CNY (red). For information from 1999 onwards, estimates based on COFER data, and allocation of unallocated reserves, are described in the text. Source: Chinn and Frankel (2007), IMF COFER accessed 10/1/2024, and author’s estimates.
The decrease from 2022Q3 can be accounted for by the decrease in the value of the US dollar (remember the shares are calculated using currency values evaluated using market exchange rates). Therefore, it is a little early to worry about the end of the dollar reserve currency hegemony.
Do we know that the sanctions caused the dollar to depreciate? Not really. From Chinn, Frankel and Ito (2024), we know until 2021, they did not. Of course, Antony and St. They are referring to 2022 sanctions due to Russia’s extended invasion of Ukraine. In ongoing work, we will assess whether there has been an impact in 2022 (once we have the data).
Oh, and the dollar appreciated (in real terms) since the sanctions were put in place.
Figure 3: Trade-weighted real value of the US dollar (blue). Up to inform. Source: Federal Reserve via FRED.
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