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Home / Business / The dollar has weakened. This is why it actually encapsulates its role as a reserve currency in the world

The dollar has weakened. This is why it actually encapsulates its role as a reserve currency in the world



It does not make much sense for the dollar to be used as widely as it is. Of course, the US economy is the largest in the world, but the dollar is on one side of 88% of all currency trading, despite the US accounting for about a quarter of global gross domestic product. Countries, particularly China and Russia, are also upset that the US is able to exercise its currency dominance to sanction government officials around the world.

But even though the dollar has fallen 8.5% from its March high, according to the WSJ BUXX dollar index,
-0.14%,
there is still no clear path or even idea of ​​how to replace the role of the dollar in the global financial system. It was only a year ago that former Bank of England Governor Mark Carney suggested that Facebook’s cryptocurrency could be a replacement, an idea that now sounds dizzying given the project battles, even as it turned out Carney’s critique of dollar hegemony when there was a dollar shortage during the onset of the coronavirus pandemic.

Brad Setser, senior fellow at the Council on Foreign Relations, says another point.

“A weaker dollar tends to lead to more interference from countries seeking to protect their exports in the foreign exchange market, and thus the accumulation of more reserves,” he says in a blog post this week. “Thus, a weaker dollar results in a higher rather than lower demand for dollars from the world’s reserve managers.”

And how do these reserve managers accumulate dollars? Buying U.S. Treasury, which comes to the rescue as the U.S. is releasing debt at a rapid pace as the latest budget deficit numbers released on Wednesday reinforce.

Setser says a number of countries returned to the market in June and July, actively working to devalue their currency – particularly Thailand, Taiwan, Singapore and India.

“Many export-oriented economies with large external surpluses are willing to let their currency fall against the dollar, but they remain willing to allow their currency to appreciate against the dollar when the wave returns. And so, “Most of the accumulation of dollar reserves in the world tends to come when the market is adding the dollar not up,” he writes.

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