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1、What if the US dollar loses its status as the worlds reserve currency?Roland Berger InstituteAugust 20232 What if the US dollar loses its status as the worlds reserve currency?No matter the metric,the US dollar clearly is the major global currency This status has both upsides as well as downsides fo

2、r the US economySHARE OF USD AND OTHER CURRENCIES IN THE INTERNATIONAL MONETARY SYSTEM,2022%Source:BIS;IMF1 Because two currencies are involved in each transaction,the sum of the percentage shares of individual currencies totals 200%instead of 100%.Adjusted for local and cross-border inter-dealer do

3、uble-counting(-net basis)USD88.0EUR31.0JPY17.0GBP13.0CNY7.0FX TURNOVER1USD58.4EUR20.5JPY5.5GBP4.9CNY2.7COMPOSITION OF FX RESERVESUSD47.8EUR38.3JPY1.3GBP7.4CNY0.6INTERNATIONAL DEBT DENOMINATIONAdvantages High and constant(foreign)demand for USD strengthens the currency,thereby making imports of forei

4、gn goods to the US cheaper Reduced borrowing costs as there is constant demand for US treasuries from countries that want to invest their USD trade proceeds No exchange rate risks for the US as emitting country of the USD Increase in financial stability,as the US is a preferred destination for capit

5、al in times of global financial turmoil,making it less vulnerable to global shocks Increased economic power and geopolitical influence:As the reserve currency,the US dollar gives the US a powerful economic and foreign policy tool,allowing the US government to exert influence over other countries thr

6、ough economic policies,trade agreements,and sanctionsTHE WORLDS RESERVE CURRENCY AS AN EXORBITANT PRIVILEGE?ADVANTAGES AND DISADVANTAGES FROM US PERSPECTIVEDisadvantages The reserve currency status of the USD makes trade deficits more likely because it creates demand for dollar-based assets and trea

7、suries,boosting the dollar exchange rate,weakening the export industry,and ultimately resulting in trade deficits and potential job losses During times of economic turmoil,investors seek the safety of the dollar,thereby squeezing US exporters at an already difficult time Artificially low borrowing c

8、osts lead to(too)high private and public spending,thereby creating asset bubblesTIMELINE OF DOLLAR DOMINANCESource:Desk ResearchThe dominance of the US dollar has been built on the strong role of the US following World War II In more recent times,the dollars dominance is being challenged3 What if th

9、e US dollar loses its status as the worlds reserve currency?1 EM refers to Emerging Markets1920s19441960s1971198119992007-2008FEB 2022APR 20232014US dollar takes up the race with the British pound sterlingAfter WWI,the USD replaces the GBP,which had prevailed until then,as the world reserve currency

10、.The US records a significant inflow of gold,as allies settle wartime payments in goldBretton Woods AgreementUSD is pegged against the gold price and over 40 other major currencies are pegged against the dollar to foster international tradeDollar-gold convertibility ceasesPresident Nixon enacts a st

11、op to the USD-Gold convertibility in order to address the countrys inflation problem and to discourage foreign governments from redeeming more and more dollars for goldEstablishment of the eurozoneWith the creation of the eurozone,European countries hope to counter-balance the USD.However,the euro d

12、id not live up to its promise today it is only slightly more relevant than the German mark used to beRussian de-dollarizationIn response to the barrage of western sanctions following the annexation of Crimea,Russia starts de-dollarizing its economy/tradeChina ramps up the use of CNY for trade,other

13、EM economies1 followChina has announced to foster the use of the renminbi in bilateral trade,e.g.with Saudi Arabia and UAE.Other EM countries also announced to rely more on the CNY in international trade,including when China is not involved,e.g.Brazil or BangladeshLarge USD supply is becoming diffic

14、ult to back with goldEuropean and Japanese exports are becoming increasingly more competitive with US exports.As the amount of USD increased,it gets more difficult to back dollars with gold80s sees strong inflationThe US dollar records a loss of two-thirds of its purchasing power after multiple year

15、s of high inflationGlobal Financial Crisis(GFC)Investors flee to the dollar,expecting it to keep its value,highlighting the dollars status as a safe havenWar in UkraineWestern sanctions boosted Sino-Russian cooperation and cause Ruble-yuan trade to increase 80-fold.Central banks around the world inc

16、reased their gold purchases and diversify away from the USDSource:IMFCURRENCY COMPOSITION OF GLOBAL ALLOCATED FOREIGN EXCHANGE RESERVES%Over the past two decades,the USD share of globally allocated foreign currency reserves has declined by around 10pp.to just below 60%.Recent efforts by some emergin

17、g market countries led by China to move away from the dollar as the worlds reserve currency are rooted in the fact many countries are concerned that the US is increasingly using the dollar and its prevailing reserve system as a weapon against other states.The seizure of Russian FX reserves in Wester

18、n central bank accounts in the aftermath of the Russian invasion of Ukraine has startled large reserve-holding countries.As a result,many countries have reduced their USD holdings and started buying gold instead.Countries like Brazil,Russia,India,China,South Africa(BRICS),some ASEAN nations,Kenya,Sa

19、udi Arabia,and the UAE are now also pushing to use local currencies in trade.Although the US dollars relevance has declined over past decades,its status as the global reserve currency remains hard to challenge4 What if the US dollar loses its status as the worlds reserve currency?200071.5%62.2%61.9%

20、58.4%USD17.5%27.1%20.1%20.5%EUR6.3%3.0%5.9%5.5%JPY2.9%4.3%4.4%4.9%GBP1.8%3.5%7.7%10.7%Non-traditional currenciesEvery night I ask myself why all countries have to base their trade on the dollar.Why cant we do trade based on our own currencies?Who was it that decided that the dollar was the currency

21、after the disappearance of the gold standard?Brazil President Luiz Incio Lula da Silva,April 2023201020202022100%100%100%100%Source:BIS;IMFTRADING IN ALTERNATIVE CURRENCIES HAS RECENTLY BECOME MUCH EASIERHistorically,only a handful of countries possessed deep and liquid markets for domestic currency

22、 assets that were open to the rest of the world.Since the early 2000s,there has been a massive increase in foreign exchange trading volumes of non-traditional currencies,i.e.currencies other than USD,EUR,GBP or JPY.Non-traditional currency markets have been very illiquid due to high transaction cost

23、s.To swap these currencies,FX dealers had to use traditional currencies,such as the USD,as an intermediary.With the rise of electronic trading platforms and automatization programs in forex markets,transaction costs for non-traditional currencies were significantly reduced,thus also reducing the dep

24、endency of using other currencies,including the USD,as an in-between.Furthermore,the growing global network of central bank currency swap lines enabled institutional investors to access other currencies more easy.However,liquidity of non-traditional currencies has increased over the past decades,mak

25、ing it easier for countries to circumvent the dollar5 What if the US dollar loses its status as the worlds reserve currency?010020030040050050150250350450550Forex trading volume of selected currencies USD bnDevelopment of amounts traded via central bank bilateral swap lines USD bn1989201620132010200

26、7200420011998199519922019 202220052010201520192020CNYAUDCADCHFSEKNOKNZDINR46632811004967791,2757576312076291303976AsiaNon-AsiaWith central banks assets around the world mounting,central bank reserve managers have become more dynamic in chasing returns.When reserves exceed the level associated with r

27、eserve adequacy,reserve managers come to distinguish different reserve tranches.The minimum required for reserve adequacy(liquidity tranche),should be held in liquid,low-risk assets,while the remainder(the investment tranche)can be more actively managed,keeping returns in mind,and invested in less l

28、iquid assets.With the Federal Reserve offering extremely low interest rates in recent years as part of its ultra-loose monetary policy,reserve managers sought out new investment targets in countries that offered at least some yield on safe assets.Contrary to bond yields in the big four currency area

29、s,namely the US,Eurozone,Japan and UK,volatility-adjusted returns in non-traditional currency markets have been more attractive in recent years.Source:IMF;Oxford Economics;InvestcoDEVELOPMENT OF TOTAL CENTRAL BANK ASSETS EXCLUDING FED AND ECB1USD trn,%GLOBAL CENTRAL BANKS ASSET ALLOCATION2%During th

30、e past zero-interest rate environment,central banks turned away from the dollar in search of secure and stable returns for their mounting assets6 What if the US dollar loses its status as the worlds reserve currency?1 Data refers to the reported central bank assets of 143 central banks.Original data

31、 was reported in domestic currencies.Exchange rates were adjusted by using Oxford Economics exchange rates.2 The Investco Global Sovereign Asset Management Study represents the views and opinions of chief investment officers,heads of asset classes and senior portfolio strategists at 59 central banks

32、 among others201510502016201620172018201920202021202115.914.812.312.011.410.3+54.1%40%Government bondsDeposits with central banksDeposits with commercial banksGovernment agencies and multilateralsNon-traditional asset classesIMF Reserve positionGold67%13%10%15%3%10%5%6%3%2%2%14%10%100%100%Source:IMF

33、;UNCTADIn the 1990s and before,international trade in goods was strongly influenced by todays industrialized countries.The US regularly competed with Germany for the largest share in global trade.Prior to 2000,the US frequently topped the world trade rankings.Back then,over 80%of countries traded mo

34、re with the US than with China.In the interim,that number plummeted as China quickly took the top spot in 128 countries,thereby giving it strong leverage to encourage trade in currencies other than the USD.So far,China has made only moderate use of this lever,as the use of the USD has also facilitat

35、ed trade for China.In the past year,however,China has stepped up its efforts to settle trade with other countries in CNY.It is reported that Saudi Arabia,for example,will accept CNY for Chinas oil purchases in the future.In addition,LNG deliveries from the UAE to China were recently settled in CNY f

36、or the first time.SHARE IN GLOBAL TRADE MEASURED IN EXPORTS OF GOODS1%The relative decline of US exports in global trade has additionally fueled the dollars diminishing role as the global reserve currency7 What if the US dollar loses its status as the worlds reserve currency?1 Share of global trade

37、is measured as each countrys exports toward World as a percentage of the global export value1614101264280199019921994199619982012201420162018202020222000200220042006200820101.88.314.411.3United StatesUnited StatesChinaExport destinationExport destinationImport originImport origin1.Canada 17.5%2.Mexi

38、co 15.8%3.European Union 15.5%1.United States 17.5%2.European Union 15.4%3.Japan 4.9%1.China 18.5%2.European Union 17.1%3.Mexico 13.2%1.European Union 11.5%2.South Korea 8.0%3.Japan 7.7%ChinaCountries top trading partners,2021The US is effectively running a double deficit,with a particularly deep tr

39、ade deficit on the one hand,and a significant household deficit on the other hand.In turn,the country has amassed record levels of debt,now surpassing USD 31 trillion,of which USD 7.4 trillion is owed to foreign borrowers.With mounting debt levels and the recurring spectacle of somewhat surreal US b

40、udget dispute(s)regarding the debt ceiling,foreign investors confidence in the stability of the United States is wavering,as recent movements in credit default swaps on 5-year senior US debt indicate.The likelihood of default remains low,as both,Republicans and Democrats are aware of the risk and ag

41、reed to suspended the debt ceiling until 2025.Nevertheless,this(repeat)wrangling process as well as all speculation does send wrong signals to global financial markets.Source:IMF;US Department of the TreasuryThe notable rise of US public debt over recent decades has diminished trust in the creditwor

42、thiness of the US government8 What if the US dollar loses its status as the worlds reserve currency?Current account balance USD bnUS general government gross debt and the holders of US debt%of GDPUS household deficit%of GDP0-200-1,000-800-600-4002000200520102002-4.02003-4.82006-2.02007-2.92010-11.02

43、011-9.72014-4.02015-3.52018-5.02019-5.72022-6.02023-6.32004-4.02005-3.12008-7.02009-13.22012-8.02013-4.52016-4.02017-4.82020-14.02021-11.62024-7.02015202020252000532022122-690-926-446-380-394-817x2.3Fed and government accountsForeignMutual fundsDepository institutionsState and local govtsPension fun

44、dsInsurance companiesUS savings bondsOtherSource:US Department of TreasuryCOUNTRIES AND OFFICIALS SANCTIONED BY THE UNITED STATES With the dollar as the worlds reserve currency,the US holds a powerful economic tool,allowing its government to exert political influence over other countries through eco

45、nomic policies and trade agreements.The most recent countries to feel the full force of US sanctions are Russia and Iran.Especially the financial sanctions against Russia,which was cut from the SWIFT banking network and whose foreign held assets were seized,have startled large reserve-holding countr

46、ies.Due to recent macroeconomic as well as geopolitical developments,central banks around the globe and especially those in emerging markets turned to gold in 2022,trying to diversify from the dollar and dollar holdings.In 2022,central banks around the world added a staggering 1,136 tons of gold wor

47、th about USD 70 billion to their stockpiles more than in any other year since 1950.With CIPS,China offers an alternative to the SWIFT payment system.Furthermore,China is collaborating with the monetary authorities in Thailand,Hong Kong and the UAE in a project called mBridge,a CBDC based solution fo

48、r real-time cross-border payments.The dollars strong global role enables the US to use it as a sanctioning tool,thus incentivizing sanctioned countries to seek out alternatives to the dollar9 What if the US dollar loses its status as the worlds reserve currency?Broad sanctions against the countrySom

49、e or all government officialsPersons contributing to conflict&destabilization of a countryPersons undermining countries sovereigntyGovernment officials contributing to conflictSource:BIS;IMF;SIFMA;ChinaBondConnect;World BankBRIEF ASSESSMENT OF THE CNY AS AN ALTERNATIVE FOR THE WORLD RESERVE CURRENCY

50、 The Chinese renminbi(CNY)falls short of important attributes to seriously threaten the dollar in its status as a reserve currency.Money managers holding FX reserves aim for keeping their FX reserves safe and liquid,i.e.avoiding credit and exchange rate risks and invest in liquid and deep markets th

51、at guarantee a painless transaction if necessary.The Chinese market does not offer this kind of security in several respects:investors are faced with a market with only little turnover in assets,bonds that are mainly held by state-owned or state-controlled financial institutions,a low score when it

52、comes to the implementation of the rule of law,and are,in addition,confronted with capital controls all of which indicates a certain lack of interest among Chinese leaders to contend the dollars reserve status.Other large economies in the region have downsides,too:The Japanese government bond market

53、 is 60%absorbed by the Bank of Japan,and there have been multiple consecutive days without trade in Japanese government bonds.Though being the second largest economys currency,the Chinese renminbi is unlikely to pose a real challenge to the dollars status as global reserve currency10 What if the US

54、dollar loses its status as the worlds reserve currency?1 The Rule of law indicator is part of the World Banks Worldwide Governance Indicators.In Rule of Law the World Bank includes several indicators which measure the extent to which agents have confidence in and abide by the rules of society.These

55、include perceptions of the incidence of crime,the effectiveness and predictability of the judiciary,and the enforceability of contracts.GDP and treasury market depth,2022 USD bnUS general government gross debt and the holders of US debt%of GDPRule of law1,2021Current GDPTotal debt securities outstan

56、ding-2.5-2.02.02.5-1.51.5-1.01.00.0-0.50.5United States1.4China0.018,10020,90025,46451,300ChinaUnited StatesChinaUnited StatesUSD 5.4 bn(CNY 36.97 bn)USD 675.4 bnWith the formation of the eurozone,many leaders in Europe hoped to create a global counterweight to the dollar as the worlds reserve curre

57、ncy.In fact,the euro is also the second most important currency globally.Nevertheless,in all relevant statistics,the euro is far from being a true global alternative to the dollar it is only slightly more relevant today than the Deutsche Mark was at its time.There are several reasons for this.First,

58、the euro area is a fragile monetary union compared with the US and not even a fiscal union.The continuous European debt crisis presents steady proof that a monetary union without a fiscal union is limited in its function.In the absence of fiscal unity,the euro will remain vulnerable to imbalances ca

59、used by asymmetric shocks;the wide range of sovereign bond yields underscores this issue.In addition,the presumably only European AAA country potentially able to provide the world with safe collateral(German Bunds)has stuck to austerity for decades.11 What if the US dollar loses its status as the wo

60、rlds reserve currency?Past hopes that the euro might become an alternative to the dollar as the worlds reserve currency are not likely to materialize for several reasonsBRIEF ASSESSMENT OF THE EUR AS AN ALTERNATIVE FOR THE WORLD RESERVE CURRENCYSource:Capital IQ;S&PEurozone countries S&P credit rati

61、ng1 2022 Yields on 10-yr government bonds across the eurozone2%1 Credit ratings are clustered according to their meaning,with Prime referring to AAA,High grade=AA+-AA-,Upper Medium Grade=A+-A-,Lower Medium Grade=BBB+-BBB-and Non-investment grade,speculative=BB+-BB-.No Eurozone countries have a ratin

62、g worse than BB+(Greece)2 Bond yields as of May 2023,coloring according to the countries ratingPrimeHigh gradeUpper-medium gradeLower-medium gradeNon-investment grade,speculativeNon-eurozone2.02.22.63.03.43.84.22.42.83.23.64.04.4GreeceItalyCyprusEstoniaAustriaFinlandFranceLithuaniaNetherlandsGermany

63、IrelandLuxembourgBelgiumSloveniaLatviaSlovakiaSpainMaltaCroatiaPortugalSource:Oxford EconomicsBased on previous assumptions,we do not foresee that another single currency will take the place of the dollar but that the current USD-centric reserve currency order evolves into a multipolar world reserve

64、 order.In our view,currencies of the BRICS countries whose rising share of global trade currently accounts for over 20%are likely to gain significantly more importance,thus increasingly able to turn away from the dollar,and demand transactions be handled in their own currencies.Were the BRICS countr

65、ies to follow this path,they would have several strong levers,not only due to their considerable and increasing relevance in the global economy,but also because of their high(and rising)share of global commodity supply as well as the shared interest of many other countries of the Global South to joi

66、n forces in order to form BRICS+.The Euro will not be a beneficiary of this changing environment because the EU is unlikely to cut its ties with the United States,and will therefore only marginally detach itself from trading in USD.12 What if the US dollar loses its status as the worlds reserve curr

67、ency?The void left by the waning role of the dollar as a global reserve currency will not be filled by another single currency but rather by several currenciesTHE BRICS COUNTRIES ARE INCREASINGLY GAINING ECONOMIC IMPORTANCE.AND THEY ARE RECEIVING MORE AND MORE BACKING FROM COUNTRIES IN THE GLOBAL SO

68、UTH200020002022202220502050Share of global GDP%Share of global trade%1,212826193421233617331327291424102010EUUSRoW1 Measured as the share in global exports 2 For the EU,only extra-EU exports are consideredBRICSSyriaAfghanistanIranPakistanTurkeyAlgeriaTunisiaSudanNigeriaSenegalZimbabweArgentinaVenezu

69、elaUruguayMexicoNicaraguaBahrainUnited Arab EmiratesSaudi ArabiaEgyptBangladeshThailandIndonesiaKazakhstanBelarusBrazilIndiaChinaRussiaSouth AfrikaNew membership bids for BRICS+Current BRICS countriesASSUMPTIONS AND IMPACT OF THE EMERGENCE OF A MULTIPOLAR CURRENCY WORLD ON VARIOUS ASPECTS OF SELECTE

70、D COUNTRIES/REGIONSSource:Roland BergerIf the current USD-dominated environment were to evolve towards multipolarity,todays geopolitical and economic order may change considerably13 What if the US dollar loses its status as the worlds reserve currency?1 Measured in terms of the proportion of trade t

71、ransactions and the associated reserve holdingUSEUBRICSRole of the regions currency1Impact on:TradeInterest rate environmentGeopolitics Due to currency devaluation,exports increase,and imports decrease Therefore,US trade deficit will likely shrink Negligible direct impact on the EUR FX rate,so that

72、only minor currency related effects on trade are to be expected Broader currency portfolios will have to be held for trading,increasing cost of trade Due to appreciation of BRICS currency,exports are getting more expensive This will likely push prices for commodities for RoW BRICS imports would beco

73、me cheaper Due to fading demand for US treasuries,financing cost surge makes debt-taking more expensive Pressure on US fiscal policy would increase further Rising interest rates in the US are likely to put further pressure on the ECB to prevent currency depreciation against the dollar Interest rates

74、 are likely to increase With the US still being a large and attractive financial benchmark,rates are also expected to increase in the RoW and BRICS However,due to rising demand in BRICS treasuries,the upward pressure is less pronounced Under a multipolar currency system,it would become harder for th

75、e US to exert its power,i.e.to impose effective financial/economic sanctions This will reduce leverage on other countries As in the US,it will also become more difficult to impose financial sanctions on third party countries BRICS countries(and RoW)become less vulnerable to US sanctions With more tr

76、ade taking place in alternative currencies,BRICS will likely gain more influence in other developing and emerging economiesSource:Federal Reserve Bank of St.Louis;Roland Berger InstituteSUMMARY AND OUTLOOK 14 What if the US dollar loses its status as the worlds reserve currency?Despite its weakening

77、 hegemony,the US dollar will persist as the global reserve currency for decades to come Its value and global reach remain unparalleled1 A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that are advanced economies or emerging market econ

78、omies Index,Jan 2006=100,non seasonally adjusted The international relevance of the USD has been declining and will likely further decreaseIncreasingly over the past year,China has been looking for(more)partners with whom it can conduct trade in renminbi.This is a notable shift,likely to reduce the

79、relative relevance of the USD in international trade and finance.The dollar is likely to remain the words reserve currency for longerEven though China is increasingly opening its currency to international trade,it currently continues to account for only a fraction of the USDs relevance.Moreover,Chin

80、a is not expected to rush the opening of its currency,e.g.by removing capital controls,so the USD will continue to be the worlds reserve currency.Emerging markets are working on a new reserve systemConcerned about the US dominance over the global financial system and its ability to weaponize its cur

81、rency,other nations have been testing alternatives to lessen the dollars hegemony.Over the past year,many emerging markets have reduced their stock of US treasuries,buying gold instead.In parallel,some central banks are already working on an alternative to the US-dominated correspondent banking syst

82、em.Dollar evolution against other currencies Nominal US Dollar Index175859510511512513580901001101201301402005200820112014201720232020126.5Advanced EconomiesEmerging Markets114.0 108.6 99.6PUBLISHERROLAND BERGER GMBHSederanger 180538 MunichGermany+49 89 9230-Cover iZonda/Getty ImagesSteffen Geering+

83、49 211 4389-2194 Christian Krys+49 211 4389-2917 David Born+49 69 29924-6500 AuthorsThis publication has been prepared for general guidance only.The reader should not act according to any information provided in this publication without receiving specific professional advice.Roland Berger GmbH shall

84、 not be liable for any damages resulting from any use of the information contained in the publication.2023 ROLAND BERGER GMBH.ALL RIGHTS RESERVED.About usROLAND BERGER is the only management consultancy of European heritage with a strong international footprint.As an independent firm,solely owned by

85、 our Partners,we operate 51 offices in all major markets.Our 3000 employees offer a unique combination of an analytical approach and an empathic attitude.Driven by our values of entrepreneurship,excellence and empathy,we at Roland Berger are convinced that the world needs a new sustainable paradigm that takes the entire value cycle into account.Working in cross-competence teams across all relevant industries and business functions,we provide the best expertise to meet the profound challenges of today and tomorrow.We welcome your questions,comments and suggestions WWW.ROLANDBERGER.COM