For over 60 years, the
U.S. dollar has enjoyed an “exorbitant privilege” as the world’s primary
reserve currency. Is that coming to an end?
Stephen Roach (9 June
2020) thinks so. The seeds of the problem as he sees it is the shortfall of
U.S. domestic savings. It is only 1.4% of national income, lowest since 2011.
To grow, the U.S. has relied on borrowings. With Covid-19, the federal budget deficit
has exploded to 17.9% of GDP (2020).
But the greenback remains
strong. Why? Dollar acts as safe-haven during periods of crisis. The dollar was
up close to 7% over January-April period against major trading partners.
Protectionist trade policies, withdrawal from various international agreements,
mismanagement of Covid-19, social turmoil are manifestations of U.S. losing its
leadership role in the world.
In the long run, the Fed’s
interest rate cuts and QEs undermines the dollar’s role as an anchor currency.
The Chinese Government has been mute over the value of the dollar. There has
been views that China should shed its USD1 trillion (5% of U.S. national debt)
in Treasuries for gold, oil, iron ore, land, farm products and equity stakes in
high-tech firms. But others believe that China has little option but to hold
U.S. bonds and gold. There is little capacity for other markets – spot,
reserve, futures - to absorb a large amount of assets.
China’s trade surplus
with U.S. since 1985 explains its accumulation of dollars. For an export-led
growth, which generates jobs, China will continue to purchase dollars.
Willingly or unwillingly China will need to purchase U.S. debt to ensure
competitiveness for its exports.
So it is not as bleak as
it seems! But Stephen Roach may have a point: “exorbitant privilege” needs to
be earned not taken for granted.
References:
1. A
Crash in Dollar is Coming, Stephen Roach, 9 June 2020
2. Why
China Buys U.S. Debt With Treasury Bonds, Shobhit Seth, 14 April 2020,
Investopedia
3. Coronavirus
Sparks U.S. Dollar Dilemma for China, Orange Wang and Zhou Xin, 26 March
2020, South China Morning Post
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