Fisher Investments Editorial Staff
Currencies

Don't Holler About the Dollar

By, 04/01/2010

Story Highlights:

  • IMF data show that, in 2009, the US dollar maintained its status as the dominant global reserve currency.
  • The US has by far the biggest economy, deepest capital markets, and is historically one of the most stable countries in the world.
  • The dollar is firmly established as the leading transaction currency in foreign exchange markets, making it difficult for users to rapidly shift to a less entrenched currency like the euro.
  • For globally diversified investors, currency effects largely cancel out over time, so a portfolio with exposure to many currencies doesn't suffer long-term ill effects from short-term currency moves.

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Somebody should tell folks to stop hollering about the dollar. (We've tried. So far? Nada. Such is life.) In 2009, foreign leaders seemed eager to proclaim dollar hegemony the root of many of the world's problems, and some seemed bent on abandoning the dollar as the world's primary reserve and invoice currency in favor of International Monetary Fund (IMF) Special Drawing Rights (SDRs) or some other super-national alternative currency. The latest rebuff to those proclaiming the US dollar's doom comes from the IMF itself, whose data show that the dollar's share of reserves increased at the end of 2009 and still accounts for the lion's share of foreign currency reserve assets globally.

As we've said before, the US has by far the biggest economy, deepest capital markets, and is historically one of the most stable countries in the world, despite the financial crisis and subsequent monetary and fiscal response. None of this is likely to change anytime soon, so the dollar's role as the world's dominant currency shouldn't either. To wit, Q4 2009 dollar reserves amounted to 62.14% of global reserves, up from 61.5% in Q3 2009. Though currency appreciation accounted for a good part of that increase, it's clear foreign governments aren't ready to abandon the greenback just yet.

Also notable: The euro's share (a dollar alternative proposed not too long ago) dropped to 27.4% from 27.8%—and some expect it to drop even further over the next two years. The eurozone is big and developed, but when it comes to stability, it has yet to prove itself equal to the US (Greek debt squabbles, anyone?). What about the remaining major currencies? Turns out they don't hold a candle to US dollars in global reserves—the Japanese yen's share dropped to a mere 3.0% from 3.2% at the end of Q3 2009, while the UK's pound sterling remained at 4.3%. All other currencies (from rupee, to ruble, to shekel, to rand) made up just 3% of global reserves—combined.  

Simply, the dollar is firmly established as the leading (and preferred) transaction currency in foreign exchange markets, making it difficult for users to rapidly shift to a less entrenched currency. And since everyone uses the dollar, businesses likely aren't in any hurry to pioneer some new alternative. The costs of doing so far outweigh the benefits (which so far appear primarily political—all bluster, no action). Further, any effort to replace the greenback with another currency would face numerous political and economic stumbling blocks and would most naturally coincide with a larger transition of economic power—a decades-long process likely only clear in hindsight. No single government or organization can mandate the details of such a massive, and plodding, economic shift.

In the meantime, speculation about the dollar's "impending" demise will undoubtedly continue—it makes a dramatic play-by-play for those intent on weaving doomsday tales of America's ultimate decline. For global investors, all this matters little since global portfolios naturally include exposure to many currencies. Currency effects largely cancel out over time, so a well-diversified global portfolio doesn't suffer long-term ill effects from short-term currency moves.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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