Dollar Dominance: Is the Reign Nearing Its End?

Despite ongoing discussions at the highest levels regarding its future, the dollar’s reign as the world’s reserve currency remains secure for now. However, growing U.S. debt levels are prompting serious concerns.

Dollar’s Grip on Global Finance

For the moment, the world has few viable alternatives to the dollar. Many nations are attempting to decrease their dollar reserves. According to Mohamed El-Erian, economist and former bond expert, “the dollar is overweight and the world knows it, which is why we have seen a rise in gold, the euro and the pound, but it’s hard to move at scale so there’s really very few places to go”.

As El-Erian put it, “The dollar is like your cleanest dirty shirt, you have to keep wearing it.”

High-Level Concerns

The governor of the Bank of England has conveyed to the BBC that the debt levels in the U.S. and the dollar’s position are “very much on [US Treasury] Secretary Bessent’s mind. I don’t think the dollar is fundamentally under threat at the moment but he is very aware of these issues and I don’t think it is something that he underestimates.”

Understanding the Debt

The U.S. national debt has surpassed $34.6 trillion as of January 2024, according to the Treasury Department (U.S. Treasury). While a debt of $37tn is an enormous figure, a more practical approach involves looking at it relative to the nation’s income. The U.S. economy generates approximately $25tn annually.

Historical Context

Although the ratio of debt to income in the United States is elevated compared to many countries, it remains lower than that of Japan or Italy. Furthermore, the U.S. benefits from having a highly innovative and productive economy.

A book from 1968, “Death of the Dollar” by William F Rickenbacker, cautioned against the risks to the dollar’s status as a reserve currency. Mr. Rickenbacker has passed away, but the dollar is still here. That being said, its standing and value should never be taken for granted.