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The massive monetary expansion in the US, the political tensions between the US and many other countries and the sharp increase in US public and external debt are all conducive to a weakening of the dollar’s role as an international reserve currency. But the absence of a substitutable debt for US Treasury debt instead points to a minor and not major fall in the dollar’s share of foreign-exchange reserves, according to economists at Natixis.

Key quotes

“The dollar’s international reserve currency status may be weakened by the considerable monetary expansion in the US, which may fuel doubt over the solidity of the dollar’s value, political tensions between the US and many countries, rapid growth in US external Debt and the risk of the US losing its fiscal solvency due to the size of its fiscal deficits.”

“If confidence in the dollar falls, one could also imagine a small fall in the dollar’s share in favour of other currencies. We have already seen this with the rise in the roles of sterling and the yen.”

“A sharp fall in the dollar’s share of foreign-exchange reserves would require an asset capable of replacing US Treasuries (and also in private investors’ portfolios). There would need to be another large, liquid and risk-free debt, which is not the case at present.”

 

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