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Dollar decline rekindles reserve currency worries
March 09, 2018
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NEW YORK: The US dollar’s nosedive over the last year — only exacerbated by the recent threat of trade wars — is rekindling concerns that the greenback’s standing as the premier global reserve currency is at risk, but data compiled by Reuters suggests such fears are overblown.

Moreover, any real threat to its pre-eminent position would take years to materialise given its commanding share of global reserves and a relative paucity of alternatives.

The US dollar index fell 10 per cent against a basket of currencies last year, its steepest drop since 2003, on evidence Europe, China and other nations are growing faster than the United States even as the Federal Reserve raised rates three times.

So far this year, it is down nearly 3 per cent amid worries about trade tension and foreign central banks’ dialing back of stimulus. It hit a three-plus year low in February.

The greenback weakened since late last week after US President Donald Trump’s surprise announcement to impose tariffs on imported steel and aluminium, stoking fears of an all-out global trade war.

“This administration is not global-trade friendly,” said Sireen Harajli, currency strategist at Mizuho in New York. Trump’s protectionist stance may have a short-term negative impact on the dollar but it may not be an enduring one, she added.

Any real threat to the dollar’s pre-eminent position would take years to materialize given its commanding share of global reserves and a relative paucity of alternatives.

“I would not worry (about) the status of the dollar as the top reserve currency in the next 20 years,” said Jack McIntyre, portfolio manager at Brandywine Global in Philadelphia.

The dollar’s status as the global reserve currency has been called into question since the 1980s with the introduction of the euro and China’s dramatic economic ascent.

The greenback has come under additional pressure in recent months in the wake the Trump administration’s contradictory views on trade.

Back in January, US Treasury Secretary Steven Mnuchin at the World Economic Forum in Davos said, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” A day later, Trump said he favored a “strong dollar.”

“I get a sense the dollar is getting increasingly punished for the unpredictability of this administration’s policy-making,” said Omer Eisner, chief market analyst at Commonwealth Foreign Exchange in Washington. “That is a big question for investors despite the favorable (economic) backdrop.”

Reuters

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