The U.S. Dollar Index, a measure of the value of the dollar relative to the currencies of U.S. trade partners fell from its March 2020 rating of 102 to its current value of about 93. March, of course was the beginning of the coronavirus pandemic.
Currency traders measure the index in small-point increments and the 93 index is as about as well as could be expected, given the worldwide panic and how many of our trading partners still haven’t gained economic traction.
The U.S. dollar, however, is still the single most popular currency in the world. It is the one dominant world-wide reserve currency, and still strong. Paralleling stock market gains, which have been remarkable in spite of a recession economy, the U.S. dollar will likely remain a bedrock of a recovering global economy.
In fact, as the coronavirus began to devastate the global economy, the U.S. dollar became the world’s de-facto currency.
Consider the following fundamentals:
- The U.S. dollar makes up over 60% of all the world’s central banks’ reserves in foreign exchange. No other currency even comes close.
- About 50% of the world’s debt is in U.S. dollars.
- Add to the above the breathtaking statistic that nearly 90% of all foreign exchange market trading is in U.S. dollars.
Economists have been predicting the decline of the U.S. dollar for years. The U.S. dollar, they said, was about to be dethroned.
Not so fast. Along came the pandemic, and like in past crises countries realized that the U.S. Dollar, backed up by the strongest economy on earth, was the safe harbor they needed.
In fact, the U.S. financial sanctuary has been in place since 1944. Towards the end of World War II, the U.S. got together with its allies to work out an international monetary fund. More than 700 representatives agreed to make the U.S. dollar the official reserve currency.
Even after the agreement ended during the 1970s, countries still indexed their currency to the U.S. dollar. That means that even if the U.S. economy dips, the U.S. dollar is propped up by influences outside U.S. borders. Because of this, the value of the dollar remains a benchmark for the pricing of goods.
In countries with a fragile economy, like Lebanon for example, the U.S. dollar is in such high demand that ATMs can’t keep up. Now there is a thriving black market for U.S. dollars in that troubled country.
Then there are the Republics of El Salvador, Zimbabwe, the South American country of Ecuador, and the South Pacific Island of Timor-Leste, all of whom use the U.S. dollar as their main currency.
U.S. debt and deficit spending are also made possible by the strong dollar. For companies and investors, holding assets in U.S. treasury bonds is a safe strategy. The U.S. Central Bank is the world’s strongest, and backs all that paper with the full faith and trust of the U.S. Government.
So, the dominance of the U.S. dollar gives the U.S. a tremendous amount of political power, and that power has to be wielded responsibly. Otherwise, the world could look elsewhere—like China, whose economy has skyrocketed and rivaled the U.S. in recent years. Unfortunately, China’s connection with the coronavirus pandemic may have put the brakes on the underlying trust and confidence every country’s currency needs.
In the meantime, however, the recent pandemic has underpinned the traditional strength and dominance of the U.S. Dollar.
Here’s the Wall Street Journal with a quick presentation.