The Dollar’s Resilience Is Not an Excuse for Complacency

The recent flurry of obituaries for the US dollar has become a familiar refrain in financial circles. Every few years, it seems, some self-proclaimed prophet declares that the greenback’s days are numbered, only to be proven wrong by its continued dominance on the global stage. The latest iteration of this phenomenon comes from the BCG Institute, which claims that the dollar’s demise has been overstated for 55 years.

Rather than focus on the dollar’s supposed shortcomings, it is more productive to examine why it continues to thrive in an increasingly complex and competitive world. Reserve currency status is not a birthright granted by historical circumstance or some mythical “exorbitant privilege.” It must be earned through a combination of economic heft, institutional credibility, and geopolitical clout.

The dollar’s ability to withstand fluctuations in value over the years is striking. Despite predictions that it would lose its status as the world’s primary reserve currency, the dollar has consistently bounced back from periods of decline. Since 2008, its valuation has been on a steady upward trend, reaching a record high in October 2022.

The dollar’s durability can be attributed to its status as a proxy for the global economy’s most liquid and secure assets. As the issuer of the world’s primary reserve currency, the US has a unique advantage when it comes to attracting foreign investment and maintaining economic stability.

However, this privilege comes with significant burdens. The rest of the world must run trade surpluses to build reserves, which makes the dollar structurally overvalued and weakens competitiveness. This dynamic also creates vulnerabilities in the form of looser credit and increased volatility in capital flows.

Other contenders for reserve currency status, such as the euro and China’s renminbi, struggle to match the dollar’s economic heft and institutional credibility. The euro falls short in terms of its willingness to supply deep pools of reserve assets and maintain geopolitical clout.

China’s growing use of the renminbi in international trade is often cited as evidence of its ascendant status. However, this narrative overlooks the fact that China has yet to commit to full capital mobility, a crucial component of reserve currency competition. In other words, China’s currency is not yet ready for primetime.

The dollar’s resilience is not an excuse for complacency but rather a reminder of the immense challenges that lie ahead in maintaining its status as the world’s primary reserve currency. The era of easy money and loose credit may be coming to an end, and it remains to be seen whether the US will continue to meet the burdens associated with this privilege.

The question on everyone’s mind is what happens next: Will the dollar’s dominance continue unabated, or will some new challenger emerge to challenge its status? In a world where economic powerhouses are increasingly interconnected and interdependent, the stakes for maintaining reserve currency status have never been higher.