Debunking The Myth: The Demise Of The U.S. Dollar

Includes: CNY, FXE, GLD, SPY, TLT, UUP
by: Mark Vierra

When I was young, my father looked up from his USA Today and told me" "Another Russian is predicting the end to the U.S. dollar (NYSEARCA:USD) reserve currency status, they've said that for years, it'll never happen in my lifetime." (He was right.) At the time, I had no idea what he was talking about, but now in my 40s, as I see all the websites calling for the USD demise, it reminds me of this, and I have to laugh at the ones that sport adds for water purifiers, seeds and all the end of the world survival gear. Whenever there is turmoil or uncertainty in the world, in times of world stress, be it "Arab spring" or "fiscal cliff," terrorist attacks or "debt bubbles," the flow of liquidity moves into the USD/Treasuries. If the stock market takes a dive, cash is king, and Treasuries soar. In this article, I will look into the U.S. dollar's reserve status.

Here are a few terms I will be using throughout this article, and their definitions:

Reserve Currency: A foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing other countries to hold this currency to pay for these goods. Holding currency reserves, therefore, minimizes exchange rate risk, as the purchasing nation will not have to exchange their currency for the current reserve currency in order to make the purchase.

Special Drawing Rights (SDR): An international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs are designed to augment international liquidity by supplementing the standard reserve currencies.

In contrast to the days of my childhood and listening to my father, there are plenty more groups that oppose the USD reserve status. China tops the list:

In this 2004 Gresham College lecture, Professor Avinash Persaud predicts: "By the mid-21st century, the U.S. will no longer be the world's largest economy."

This 2007 Reuters report quotes Alan Greenspan: "Euro could replace dollar as top currency"

(5/9/2009) A Project Syndicate former Dutch Executive Director of the IMF author Onno Wijnhold wrote this: "The Dollar's last days?"

(5/26/2009) A Businessweek article quote: "Why have perceptions started to change?"

(6/20/2009) VOX author Helmut Reisen's prediction: "China is on its way to becoming the world's largest exporter. So these historic parallels might imply a switch in the reserve currency by the mid-21st century. This column discusses the issues at hand and explains why some experts would prefer the IMF Special Drawing Rights as the next global reserve currency."

(1/6/2010) The Council on Foreign Relations also adds their voice in this article: "How Dangerous Is U.S. Government Debt?"

(12/27/2010) TheRealNews video interview with Michael Hudson, a Research Professor at University of Missouri: "World Tired of Paying Bill for U.S. Military"

(6/29/2010) A Reuters article: "Scrap dollar as sole reserve currency: U.N. Report"

(1/17/2011) A BBC report: "China's Hu Jintao: Currency system is 'product of past'"

(2/10/2011) CNN Money reports: "The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency. The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system."

(3/1/2011) This Wall Street Journal author explains his views: "Why the Dollar's Reign Is Near an End"

(3/16/2011) A Forbes article that makes this claim: "Central Banks Dump Treasuries As Dollar's Reserve Currency Status Fades"

(5/25/2011) A Reuters report: "U.N. sees risk of crisis of confidence in dollar"

(7/5/2011) This Business Report article sites: "Dollar 'losing grip as world's reserve currency'"

(9/8/2012) This Vladimir Radyuhin article from The Hindu publication: "Putin advocates multiple reserve currencies"

Putting Things Into Perspective

The one thing these articles have in common are that they are all decades late to the party. A new diverse group of anti-USD agendas has developed since my father's day.

After reviewing these articles, one might concede that the USD has, in fact, lost its default reserve status. After reviewing the hard data, I find that only true in part. Much confusion about statements claiming USD supremacy include its mandatory use. Claims that USD reserve status allows checks that never get cashed are misleading. The fact is that trade partners can, and do, use whatever type of payment that they agree upon.

Historically, the reserve currency is a direct causal occurrence of being the largest exporter. However, claims that China's gross domestic product (GDP) will overtake the U.S. are invalid arguments since China is largely dependent on the U.S. and our GDP for their exports in the first place. The United Arab Emirates using Yuan for oil trades with China is a non-issue based on the fact that the amount of oil actually exported is only just a small part of Chinese oil trade. And, Mid-East countries dumping the USD for oil is also unlikely considering the vast amount of trade (excluding oil) with the U.S.

Claims of countries dumping the U.S. dollar/Treasuries are also unfounded. If you look at the main reason that central bank managers support a portfolio of liquid currencies that include a large amount of the USD, it's that they have to sustain a stable balance that holds its value. It's as simple as looking at the current intermediate-term chart of the USD index (USDX or DXY), as well as U.S. Treasuries (NYSEARCA:TLT) to see the empirical evidence that these are false claims.

To the contrary, over the years, the resilient strength of the USD continues to confound many economists. It is a case of the better of the bad. (i.e., choosing the best-looking of all the ugly-looking houses on the block)

(click to enlarge) Weekly /DX (U.S. Dollar Index Futures)

(click to enlarge) Monthly TLT (20yr U.S. Treasury ETF)

The USD has not been the only reserve currency for many years (e.g., SDRs and a substantial amount of euros are held by Central Banks). Also, many partners with China trade in yuan, sometimes referred to as the renminbi (NYSEARCA:CNY). However, all of this is a tiny fraction when looking at the enormous amount of U.S. global trade. The BRIC (Brazil, Russia, India, China) nations -- and as of 2011, many consider South Africa the newest member of the BRICS -- use other currencies when trading with each other, and are only a small minority of the total global trade. It's important to remember that the largest trade partner is what normally determines the preferred currency.

There is even the argument that the mere desire to dump the USD as the default reserve currency because "the world hates America" is a point in the anti-USD advocates favor (e.g., 3/27/2012 A Seeking Alpha article "10 Reasons Why The Dollar's Reign As The World Reserve Currency Is About To End", Reason #10 states: "Most Of The Rest Of The World Hates The United States"). I think it's important to highlight that much of the general dissension surrounding the USD is due to a widespread disgust at the thought of Americans trying to take advantage over the world economy. Not just on any monetary level, rather a personal, "I just hate Americans and or their lifestyle and values, therefore, I cannot go along with their currency as a default reserve" point of view. From progressives like George Soros (i.e., his open border, one world bank and currency, one world government and one world court advocates philosophies), the Open Society Foundation, and Gerald Celente (i.e., end of the world, riots will hit the street types), to many members of the United Nations and IMF, all seem to relish the idea of a USD demise.

In 2009, the United Future World Currency was born. Tactics included a despicable marketing program that involved preying on human emotions with a so-called awareness campaign on human trafficking due to the coins' use.

And no one wants to discuss it, but when there's turmoil in the world, the U.S. military has always been there to bail out the region or nation in trouble. Despite this "love hate" relationship, the USD remains the safe haven currency of choice. Furthermore, I believe this contributes greatly to why the USD dominates as a default reserve currency, regardless of the aforementioned dissension.


Today, the U.S. dollar holds a 61% majority over the other popular reserve currencies.

Source Wikipedia

Most economists will agree SDRs have already all but failed. They are sometimes referred to as the Esperanto of the currencies, mainly held by the IMF and other countries as a token honorary part of a central bank's portfolio. Also, remember unlike fungible currencies, you cannot buy groceries with SDRs. In my opinion, the concept of SDRs was fundamentally flawed from the beginning.

The number of economies using USD has been holding steady over the years:

China tops the list of countries holding the USD:

Source Wikipedia

Trade between China, the BRICS nations, and the other countries using euros, yuan or SDRs are a small fraction of the global whole. The fact is, if you look at a comparison chart of the S&P and China or emerging markets, the evidence is clear that without a strong U.S. economy, the rest of the world falters to a larger degree.

(click to enlarge) S&P ETF (NYSEARCA:SPY) verses Emerging Market ETF (NYSEARCA:EEM)

China allowed their currency to float, creating an unwanted strength in the yuan. China then re-pegged to the USD from 2008 to 2010 to halt the ascent, and now, they are very slowly allowing their currency to float to the USD. This manipulation will continue to keep the yuan/renminbi from being a perspective reserve replacement. This chart reflects the steep drop in USD value versus the yuan from China pegging to the USD as opposed to the only slight decline after removing the peg in 2010. China is able to slow its currency appreciation by various methods, the USD/Treasury asset accumulation not withstanding (i.e., if China wants to entertain the idea of their yuan as a reserve currency, that would spell strength for the USD).

(click to enlarge) USD/CNY

It is my belief that China realizes the double-edged sword of the widespread use that would create an unwanted demand, and that they can't have their cake and eat it, too. I think China will continue to artificially devalue their currency for many years to come and the current slow increase in value is no more than a dog and pony show (i.e., they are showing the world, "Look, we're not currency manipulators.").

The safe haven (explained in another article I've written) phenomenon has and will continue to keep the USD value stable, despite rising U.S. debt and the USD naysayers.

I find it naive to draw conclusions with the facts at hand, yet many are adamantly predicting the demise of the USD and/or the fall of the global economy. I would only point out that this kind of radical speculation is pointless, and refer them to another article of I wrote that touches on the philosophy of non-objective reasoning. My own personal speculation is optimistic for the U.S. economy. I am bullish over the long term on the S&P (SPY) and the value of the USD (NYSEARCA:UUP), as well as the euro (NYSEARCA:FXE) and, believe it or not, gold (NYSEARCA:GLD) and U.S. Treasuries.

Disclosure: I am long UPRO, AAPL, FCX, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.