Bite-Sized Economics

Video Content

US dollar dominance is here to stay

Every so often, the predictions come out with regard to the declining status of the US dollar.

There is the tall poppy syndrome appeal of the story - that the mighty US dollar would fail, and how synonymous it would be with a declining economic influence of the US.

The idea arose when the euro was first developed, and again with the rise of crypto currencies. Today, the subject comes up again with the news that BRICS nations (Brazil, Russia, India, China and South Africa) are working to create its own currency.

You could also speak of central banks around the world which have been gradually reducing their holdings of US denominated assets over time, as a proportion of their international reserves.

But the truth is that the US dollar is still dominating global finance, and there isn’t much evidence to say that US dollar dominance is diminishing. This is what I hope to show in this animated chart, which shows total over-the-counter foreign exchange turnover over time from the Bank for International Settlements (BIS).

US dollar dominance isn’t going away anytime soon. The thing is, while a nation might have bragging rights about greater use of their national currency, if a currency were to truly have a similar status to the US, it could also come with some pitfalls. For one, that country would have to give up controls on its capital flows ie. Money going in and out of that country. Secondly, that country would also have to accept a current account deficit. What that means is that it will come with a major shift in savings and investment in that country.

It is not enough for a currency to be widely taken up in trade transactions. If the US dollar were to be replaced, there needs to be the depth of financial market instruments to support everyone holding that currency on a big scale.

No other currency is even close to that description.

Understanding the global economy and financial markets in 2023

In keeping with the theme of delivering bitesized content, here is my first video!

Yes, I have entered the brave new world of video editing. I do have to say, I have a newfound appreciation for all the work that goes on behind putting a video together.

In this video, I discuss three numbers you should be watching when assessing the global economy and financial markets for this year. They are:

1) China’s economic growth target

2) The oil price

3) The US unemployment rate

All the above will help us understand the key themes of whether the world economy will enter recession this year, and of course, inflation.

As stated previously, a turnaround in China’s economy is a bit of a wildcard for the global economic growth this year. Whether it will be enough to counteract weak growth among advanced economies remains to be seen, but it is becoming increasingly obvious that China’s economy will rebound strongly this year. A clearer indication will be when China sets its growth target – which has rumoured to be at least 5%, and not due to be officially announced until March.

Meanwhile, inflation has been front and centre of policymakers’ minds in recent times. It may be a relief for investors to see inflation down from its peaks, but the US Federal Reserve should also be watching the unemployment rate closely. Even if headline rates of inflation will come down, interest rates are likely to still rise, or stay restrictive if the unemployment rate doesn’t end up rising.