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March 16th 2010

Dollar Returns to Favor as World’s Reserve Currency

Rumor has it that the Dollar is about to make a run. As the credit crisis slowly subsides, (currency) investors are once again looking at the long-term, and they like what they see when it comes to the Dollar.

For those that care to remember, 2008 was a great year for the Dollar, as the credit crisis precipitated an increase in risk aversion, and investors realized that despite its pitfalls, the Dollar was (and still is) the most stable and really the only viable global reserve currency. [This reversed a trend which had essentially been in place since the inception of the Euro in 1999]. In 2009, meanwhile, the Dollar resumed its multi-year decline, and many analysts were quick to label the rally of 2008 as an aberration.

Then came the debt crises, first in Dubai, then in Greece. Suddenly, a handful of smaller EU countries appeared vulnerable to fiscal crises. Japan officially became the first of the Aaa economies to receive a downgrade in its credit rating. The British Pound is dealing with crises on both the political and economic fronts. According to Moody’s, “The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently ‘stable’…But…their ‘distance-to-downgrade’ has in all cases substantially diminished.”  Suddenly, the Greenback doesn’t look so bad.


I want to point out that in forex, everything is relative. (Novice) forex investors are often baffled by how sustained economic and financial crises don’t immediately result in currency depreciation. The explanation is that when the crises are worse in (every) other countries, the base currency still looks attractive.

This is precisely the case when it comes to the US Dollar. To be sure, the economy is still flawed, financial markets have yet to fully to recover, the federal budget deficit topped $1.8 Trillion in 2009, and government finances seem close to the breaking point. Moody’s has also identified the US as a candidate for a ratings downgrade. And yet, when you look at the situation in every other currency that currently rivals the US for reserve currency status, the Dollar still wins hands down.

Its economy is the world’s largest. So are its financial markets, which are also the deepest and most liquid. Its sovereign finances are still manageable from the standpoint of debt-to-GDP and interest-to-revenue ratios. It is the only currency whose circulation can even come close to meeting the needs of global trade. Summarized S&P – when it confirmed the AAA credit rating of the US, “The dollar’s widespread acceptance stems from the U.S. economy’s fundamental strength, which in our view comes from the economy’s size and the flexibility of labor and product markets. We view U.S. banking and capital markets to be dynamic and unfettered relative to their peers.”

That’s why auctions of US Treasury bonds remain heavily oversubscribed (demand exceeds supply), despite the rock-bottom interest coupons. China has reaffirmed its commitment to Treasuries (what other choice does it have), confirmed by some forensic accounting work. Gold might continue to rally. So will other commodities, for all I know. Emerging market currencies are still in good shape as well, but none of these will seriously rival the US Dollar for a long-time, if ever. In short, when it comes to the other majors, the Dollar is still King: “You can say whatever you want, but the dollar is the currency of last resort It’s the currency people want in a crisis.”

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Posted by Adam Kritzer | in News, US Dollar | 5 Comments »

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5 Comments of “Dollar Returns to Favor as World’s Reserve Currency”

  1. Justin Says:


    You are really wrong on this for so many reasons I can’t even begin to explain. But I will say this, you’re article was pointless and probably left a lot of people who were dumb enough to follow your advice in the dust today as the dollar high new lows.

    Your basis for holding the dollar is just stupid. It’s amateur and you obviously feed into mainstream media and then blog about it here. Nothing speical about this site or your forex ideas so unless I’m proven wrong and the dollar reverses, you’re off my rss and I won’t visit this site again.

    By the way, thankfully I understand economics and can’t be jerked around by the mainstream media so I knew the short the dollar and I’ve been very happy thus far. How about you? Better get some ads up if you wanna pay that mortgage on time jerk.

    [editorial update on April 27: looks like the Dollar is trading at a 1 year high against the Euro. best of luck with your own mortgage there Justin! :D]

  2. Carmen Says:

    This is great news. I’m glad the dollar is starting to bounce back, but I’m still skeptical about it. Do you think this trend will continue?

  3. kelly ramirez Says:

    Last year was tough for the USD. Many countries were itching to replace the dollar as the reserve currency. China and Russia were the so open about challenging the dollar’s reserve status. Now that the crisis is slowly by slowly drifting away, the dollar is back with a vengeance.

  4. EU Debt Crisis: Perception is Reality. Is the Euro in Trouble, or are Fears Overblown? | Forex Blog Says:

    […] Forex « Dollar Returns to Favor as World’s Reserve Currency | Home […]

  5. Mario Leon Says:

    We do a lot on international trade and the dollar demise and fluctuation last year has benefited our business for the wrong reasons: It is cheaper to buy in USA nowadays.
    However, in the long run a strong and stable dollar has many more lasting benefits for us and for the countries that we trade with, because it reflects on more revenues for the products that they export to the US and generates more business opportunities.

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