US Dollar risks losing its special global standing due to policy decisions

According to Fitch Ratings analyst, James MacCormack, there is a likelihood of the US Dollar surrendering its exorbitant privileges and ultimately losing its special global standing due to a number of factors. Some of the factors that have been identified by James are related to U.S. policy decisions. The statement from James seemingly received some sort of backing from the Russian President, Vladimir Putin, during the St. Petersburg International Economic Forum. Putin told participants at the event that US actions undermine the advantages created by the Bretton Woods system, thus “trust in the US dollar is falling.”

The major reasons for the dollar’s dominance in the global space are inertia and the lack of viable alternatives. However, analysts have stated that policymakers in the United States should not be too comfortable with these reasons particularly in the longer term. The economic sanctions and protectionist trade initiatives in the U.S. foreign policy are some of contributions to a diminished role for the dollar. Such protectionist policies will ultimately divert trade away from the U.S. and might even induce new trade partners to settle in other currencies other than the USD.

Competition from abroad

U.S. policies in recent times have pushed countries like Iran and Russia away from the dollar. China and the euro zone have also been actively touting their currencies as reserve and transaction substitutes.

Several European officials have hyped the role of the euro, with European Commission President Jean-Claude Juncker in his 2018 annual program address that it is “absurd” that 80% of European energy imports are settled in dollars. This is a clear indication that countries across the globe are continuously looking for substitutes for the dollar, especially as it is becoming increasingly difficult to bridge policy differences.

Finding safe haven elsewhere

Disentangling the causes and consequences that tie the dollar as the world’s reserve currency to U.S. Treasury securities is difficult. However, the effect of foreign investors – central bank reserve managers in particular – seeking risk-free dollar assets other than Treasurys should be considered.

More economic news and other related information as well as the services offered by Pacific Capital Advisors can be found on their website.

About Pacific Capital Advisors

Pacific Capital Advisors is an independent investment management practice founded on the philosophy that an active, opportunistic and adaptable approach to investing provides clients with the best chance for the realization of long-term positive returns irrespective of prevailing market environments.