US Dollar, Treasuries may retain special status much longer for unexpected reasons
The US dollar’s drop and Treasury yields’ surge during the recent bout of capital-markets turmoil has led some analysts to make bold predictions about those assets.
They say that the dollar is losing its status as the world’s reserve currency and that Treasuries are losing their status as the world’s safe haven investment. The Bloomberg Dollar Spot Index has lost 3.1% since March 31, a big move for currencies. Meanwhile, the 10-year Treasury yield has jumped 57 basis points to 4.56%.
Those calling for the downfall of the dollar and Treasuries may be on to something, but there’s also a chance they’re wrong.
For there to be a change in the primary global currency, there has to be a reason for the old currency to fall from its perch and for the new currency to rise. For example, when the dollar took over from the British pound as the primary currency in 1945, Britain’s empire was crumbling and its economy was decimated by World War II. At the same time, the US economy was surging, helped by technological innovation and massive government spending.
Factors may not be in place for dollar to fade
Moving forward to the present: What could take away the dollar’s reserve-currency status? Tariffs can certainly hurt the US economy, but they may hurt foreign economies even more. Soaring budget deficits could do the trick, but they haven’t so far and may shrink in any case.
Perhaps more importantly, there’s no obvious choice to replace the dollar. The other major currencies are the yuan, the euro and the yen. All may be unlikely candidates. The yuan doesn’t even trade freely, with the Chinese government controlling its value. It’s difficult for investors, companies and governments to hold a currency that doesn’t respond to market forces.
As for the euro, member economies have been in retreat for the last 15 years. That creates a shaky foundation for a reserve currency. The yen faces this issue too, except that its economy has been in retreat for 35 years.
Looking at Treasuries, the same arguments hold. US government bonds may face volatility because of turbulence in the economy and financial system, but China, Europe and Japan may well face worse. And their bond markets don’t have nearly as much depth as the US.
So there’s a good chance the dollar and Treasuries will retain their special status.
