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Some analysts have warned that the U.S. dollar may soon lose its status as the world’s reserve currency.But UBS currency strategist Syed Mansoor Mohi-uddin thinks its status is safe for a little while. From a new note to clients:
The dollar is likely to remain the world’s reserve currency over the next 50 years, having supplanted sterling for good a half a century ago. Admittedly, this ‘eternity forecast’ could be derailed if a deadlocked Congress refused to raise America’s debt ceiling. But in the absence of the US government defaulting in future, the dollar’s dominance may prove surprisingly durable. Reserve managers choose to hold foreign currencies on the basis of trade flows, stable exchange rates, liquid asset markets and the willingness of reserve-currency issuers to internationalise their currencies. The dollar meets all these criteria. Future rivals may not. In addition the dollar also benefits from the military protection the US offers many reserve- holding nations. A long term bet the greenback will retain its reserve status is thus also a bet America will maintain its current dominant military position over the next few decades.
He points to a couple of characteristics that make the US dollar outstanding:
- The U.S. has the world’s largest economy and its financial markets are the deepest
- International trade has been mostly settled in dollars
- The dollar is used in 85% of all foreign exchange transactions according to the Bank of International Settlements
- Central banks hold more than 60% of their reserves in dollars according to the International Monetary Fund
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