By Jamie McGeever

ORLANDO FL (Reuters] – Although the U.S. dollar continues to lose ground in terms of global currency reserves, it is still a significant part of global finance’s dominance. Reserve stashes, however, are just one measurement of that dominant status and will not be able to reverse its current position anytime soon.

Private businesses and central banks need to have their emergency funds in readily accessible liquid assets, which can be found in widely accepted currencies, plentiful supplies, and jurisdictions that recognize international law.

These criteria all meet the requirements of the dollar. No other currency can come close to it, even though global trade flows and central bank reserves have been increasingly spread over a larger range of currencies.

In the International Monetary Fund’s most recent cut of central bank reserves, it shows that the dollar’s share of the pie at year’s end – prior to Russia’s invasion and subsequent freezing of Moscow’s FX reserve – was 58.8%.

This is a decrease of 59.2% from the previous quarter, and it’s the lowest level since 1999/2000 when comparable data was first collected. This trend is long-term. In 2002, the dollar had a greater share of known or “allocated” reserves than 70%.

According to data from the Bank for International Settlements, approximately 88% of all global foreign currency transactions were made in 2019, with dollars being bought and sold. Over the past two decades, this trend has held steady.

In October, a U.S. Federal Reserve paper showed that approximately 60% of foreign and international currency assets and liabilities – principally claims and loans – were denominated and accounted for in dollars. Since 2000, this share has been fairly stable.

Global trade accounts for 40% of goods transactions. The United Nations Conference on Trade and Development reported that global trade reached $28.5 trillion in 2021.

From 2000 to 2020, China rose to the top of the global economy, soaring dollar reserve demand from Asia following 1997’s crisis and a boom in globalisation, cross-border capital, trade and investment flows.

These forces won’t hold up for the next twenty years. As such, dollar demand will drop, even though it is slow and at the margins. But demand for all reserve currencies will also fall. The relative value of currencies doesn’t necessarily mean that the greenback is going to lose.

You still require an alternative. It took sterling losing its position as No. 1 reserve currency in the world after two World Wars, and then the loss of Empire. Paul Donovan (chief economist, UBS Global Wealth Management), stated that sterling is the world’s No. 1 reserve currency.

“UNASSAILABLE”

Two leading academics have been at the forefront of debates over future dollar reserve status. Professor Barry Eichengreen from University of California Berkeley and Adam Tooze of Columbia University are both on each side.

Eichengreen, along with his co-workers, argue that dollar’s singularity will slowly diminish in a multipolar world. In an IMF work paper, https:// last month they stated that central bank reserve manager have undertaken “active portfolio diversification”, into “non-traditional” currencies, for many years.

Tooze agrees with this assertion, but says https:// that some of these currencies, like Canadian and Australian dollar are “very much part” of America’s extended security system. These currencies are protected and strengthened by dollar swaplines between the central banks and Fed.

The United States would likely be in an economic conflict or war with China and Russia if it were.

For official reserve or vehicle currency use, the only credible and long-term competitors to the dollar are the euro and the euro.

There are many reasons that it may take several years for them to be considered safe and liquid.

While the euro lacks high-quality assets that central bank can use to store value, it is not backed by a government. International investors could be discouraged by the politics in a bloc of 19 nations.

It could take decades in China’s situation. The yuan does not convert overseas fully and Beijing is unlikely to welcome any currency appreciation.

Joey Politano is an analyst with the U.S. Bureau of Labor Statistics. He also writes a personal blog about economics. The “proper combination of deep capital markets and clear rule of law as well as massive economic size and technological dynamism” is unique to any other country.

Other columns:

– Russia central banks freeze could haveten ‘peak’ world FX reserve: Mike Dolan (Reuters March 2)

– China could balk at the unnerved reserves for yuan. Mike Dolan (Reuters 18 March)

(The views expressed in this article are the opinions of the author. He is a columnist with Reuters.

(By Jamie McGeever. Editing by Andrea Ricci.