Rana Foroohar (September 30) highlights the potential decline of US dollar assets as a major destination for international investors, building on the thesis of a “Doomsday Dollar” scenario presented recently by AG Bisset Associates. This thesis is based primarily on the prospect of a weakening in the stock prices of US-based multinational companies and a decline in the foreign currency value of the US dollar.
This thesis is problematic for a number of reasons.
By focusing on US stock prices, the “doomsday scenario” ignores the various ways in the which the US dollar acts as the primary currency for the global economy and US government securities serve as the pre-eminent global safe asset for international investors and official reserves. This latter role of the US dollar reached a peak during the global financial crisis, even when US financial markets were at the epicentre of the crisis, as foreign investors massively shifted funds into US government securities as a safe haven from financial market turmoil.
In defending the “doomsday scenario”, Ms Foroohar also ignores the prominent role of the US dollar as the major currency for the denomination of international trade and the valuation of international debt securities. These roles are reinforced by the fact that the dollar remains the dominant currency used in global foreign exchange transactions.
Finally, the “doomsday scenario” envisages a near-term loss in the value of the US dollar against other major currencies, such as the euro and yen, as a further signal of its decline in the international monetary system. However, such a prediction ignores the fact that the dollar (in real terms) has been subject to recurring cycles of appreciation and depreciation since the end of the Bretton Woods era in the early 1970s, without diminishing its pre-eminent role in the international system.
As long as there are no major alternatives to the US dollar for the pricing of foreign trade and financial transactions and the US government maintains long-term fiscal sustainability, this role is likely to endure.
Chevy Chase, MD, US