ECONOMIC SOCIETY OF SINGAPORE WEBINAR SERIES

Jamus Lim

Sep 23, 5:00 – 6:30pm SGT (via Zoom)

WILL THE US DOLLAR CONTINUE TO BE THEDOMINANT RESERVE CURRENCY?

5th in FT Executive Education Rankings 2020 (3rd for Custom Programs)

Reserve Currencies and Uses of Money

• Store of value

• Asset/reserve currency

• Medium of exchange

• Vehicle/intervention currency

• Unit of account

• Invoicing/anchor currency

Currently, the USD enjoys the overwhelming share of official reserves allocation…

…and this share has hardly budged over the past 5 years (and notably, the RMB has not gained)

The dollar remains preeminent as both a public and private store of value

Central bank swap lines with the USD has scaled back after unprecedented liquidity demands in March (although the surge itself is telling)…

…and the dollar squeeze remains a challenge (cross-currency basis often negative), since EM borrowing still USD-denominated (original sin)

USD dominance as a medium of exchange, likewise, remains unparalleled

Even though the petroyuan is making some headway in private transactions,

the RMB has slipped in importance as a global payments currency

The USD remains the primary unit of account, even in global oil markets

The composition of reserves in the immediate aftermath of the second world war was still

dominated by the GBP, but this changed quickly

After excluding Commonwealth countries, the currency composition of global foreign public

debt shifted dramatically after WW2

Reserve currency primacy switches can besharp and sudden

Source: Chitu, Eichengreen & Mehl (2014, JDE)Source: Eichengreen & Flandreau (2009, Eur Rev Econ Hist)

Distribution of world output, 2010(Total: $4.6 tn 2005 USD)

Distribution of world output, 2030(Total: $7.6 tn 2005 USD)

On the basis of the quantity equation, theworld will likely evolve into a tripolar regime

One driver of the collapse of the Roman Empire was budget overextension to finance wars,

followed by currency debasement…

…and the comparable forecast debt expansion in the United States does not bode well on the front

of debt monetization

What might the trigger for a shift be? It’s Mostly Fiscal

Source: CBO (2019)Source: SocGen/Tulane

The movements of the dollar have historically followed fairly distinct regime shifts between

relative strength and weakness…

…and the recent performance of DXY is suggestive of a near-term shift to weakness, although whether this is a trend is uncertain

Might we be in the midst of a USD regime shift?

Source: MarketwatchSource: SocGen/Tulane

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