Eurizon SLJ Asset Management, an asset management firm, has issued a warning that the erosion of the US dollar’s status as a global reserve currency has accelerated at an alarming pace in recent years, particularly following the onset of the Russia-Ukraine war. The firm’s strategists, Joana Freire and Stephen Jen, have noted that the US dollar has declined by 8% in one year, which is equivalent to 10 times the average annual pace of erosion in the USD’s market share in the prior years. They also emphasized that the greenback’s share of global reserves has decreased from about two-thirds in 2003 to 55% in 2021 and 47% in the following year.
According to Eurizon SLJ, the US dollar has experienced a significant decline as a preferred reserve currency in 2022, despite its continued dominance in international trade. The strategists have written in a note on Monday that they believe the erosion of the dollar’s reserve currency status has accelerated in recent years at an alarming pace, especially since the start of the Ukraine war. They have also noted that the dollar’s share of currency turnover increased from 85% in 2010 to 88% in 2022, citing data from the Triennial Central Bank Survey conducted worldwide by the Bank for International Settlements (BIS).
The strategists have further written that the US dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions following the outbreak of the Russia-Ukraine war. They added that exceptional actions taken by the US and its allies against Russia have startled large reserve-holding countries. Russia became largely isolated from the global financial system after it invaded Ukraine last year, leading the Kremlin to rely more on the Chinese yuan. Nonetheless, the Eurizon SLJ strategists believe that the USD will likely continue to enjoy dominance as an international currency for a while longer.
The US dollar has been the world’s dominant reserve currency for decades, but now, the decline of its status as a global reserve currency could have significant implications for the US economy and financial markets worldwide. It could lead to a decline in demand for US Treasuries, higher interest rates, and a weaker US dollar, which could result in higher inflation and slower economic growth.
In conclusion, while the US dollar’s status as a global reserve currency is declining at an alarming pace, it is likely to continue to enjoy dominance as an international currency for a while longer. Nonetheless, the decline of its status could have significant implications for the US economy and financial markets worldwide.
