It has been a turbulent start to the new millennium, thanks to the dotcom crash, 9/11, the financial crisis, the euro crisis, Brexit, the presidency of Donald Trump, the Covid-19 pandemic and conflicts in Ukraine and Gaza.
Through it all, one constant remains: The US dollar's status as the dominant global currency.
The greenback remains the world’s reserve currency, a safe haven and a port in every economic storm. It is the go-to asset class whenever investors lose their nerve (which they have done a lot lately).
The dollar’s dominance looks unshakeable. It makes up about 60 per cent of the world's foreign exchange reserves, way ahead of the second-placed euro at only 20 per cent.
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About 88 per cent of all foreign currency transactions have the dollar on one side, while half of all international trade is conducted in dollars.
People know the dollar. They trust it. Over the past decade, it has only got stronger, climbing 25 per cent against the euro, 30 per cent against the sterling and 50 per cent against the Japanese yen. Only the Swiss franc has held its own against the all-conquering dollar.
Yet the strength of the dollar has also sparked political backlash, as the US uses its currency dominance to impose sanctions on Russia for its invasion of Ukraine.
Commodity-producing countries resent the price of oil and other natural resources being at the mercy of movements in the value of the dollar.
China is keen to de-dollarise the global financial system, along with the Brics alliance.
Tony Hallside, chief executive of Dubai-based broker STP Partners, says dollar resilience now faces a series of challenges as the great power contest between the US, China and Russia intensifies.
“The dollar’s future as the global reserve currency remains uncertain, with potential implications for international trade, finance and the broader geopolitical order,” he says.
The US Federal Reserve is another threat. It was expected to cut US interest rates six times this year as inflation ebbed.
This would hammer yields on US Treasuries and finally drive down the dollar. Even longstanding bulls were expecting the dollar to struggle.
In January, Charles Schwab warned that “the dollar may drift generally downward” as rate cuts came into effect, while in February, Scotiabank said de-dollarisation would threaten its reserve status.
In March, the Bank of America went further and warned of a possible US dollar collapse, with the country’s national debt rising by $1 trillion every 100 days.
In April, the dollar fell against the euro, New Zealand and Australian dollars, sterling and the Swiss franc.
What JP Morgan analyst Meera Chandan calls “dollar exceptionalism” appeared to be under threat but the sell-off didn't last long. Now it's fighting back.
“Despite uncertain macro conditions, the dollar has continued to demonstrate strength – largely thanks to sticky inflation, a resilient US economy and year-to-date highs in yields,” she wrote in a note recently.
The dollar is still the one to beat and this looks set to continue as the Bank of England and European Central Bank look set to cut rates before the Fed, says Vijay Valecha, chief investment officer at Century Financial.
He says that no currency can match the US dollar, which is backed by its “vast, open and fluid $27 trillion Treasury securities market”, which is unparalleled.
“In comparison, Europe's bond markets are fragmented, Japan's bond market is tightly managed by its central bank and China is restricted by capital controls,” he adds.
The biggest threat to the US dollar is internal, with the country politically divided, while the national debt surges past $34 trillion and neither President Joe Biden nor Republican challenger Mr Trump seem inclined to do much about it.
At some point, something has to give, Mr Valecha says.
“US debt and deficits are unsustainable in the long term and could, ultimately, undermine confidence in the US dollar.”
We are not there yet, though, and today’s geopolitical uncertainties could end up saving the dollar, Mr Valecha says.
"In moments of global uncertainty, the world turns towards the dollar rather than away from it.”
Yet the strong dollar is not all good news for the US, says Mohamed Hashad, chief market strategist at Noor Capital.
Its strength drives up the cost of US exports, potentially hitting sales and stock prices, which can even pose headwinds for the Magnificent Seven mega-cap technology stocks.
“However, the relationship is not always clear-cut, as the tech companies are mostly domestic-focused and their performance depends on factors like the US economy, company news and industry trends,” Mr Hashad says.
As gross domestic product and jobs growth slow, the US stock market may tumble from today’s high, says Marc Pussard, head of risk at APM Capital.
The old phrase that when America sneezes, the world catches a cold holds true today, Mr Pussard says.
“A falling US stock market and faltering economy would have global consequences, and other global indices would most likely retreat, too.”
Yet there is growing concern that the S&P 500 is now expensive, and share prices could retreat, especially if inflation stays high and those US interest rate cuts are pushed further back, he adds.
Arguably, gold is the dollar’s only challenger, as central banks such as China build their supplies of the precious metal to wean themselves off dollar dominance.
Cryptocurrencies have failed to shake the greenback, Mr Pussard says. “Bitcoin is by far the most traded cryptocurrency, but its value is always reported in US dollars. Dollar domination is here to stay.”
Even the Fed cannot sink the dollar, says Joshua Mahony, chief market analyst at Scope Markets, as perceptions that it will slash rates may prove wide off the mark.
“Wednesday’s consumer price inflation release is likely to hammer home the fact that resurgent price pressures make a return to 2 per cent CPI difficult to see,” Mr Mahony says.
The US may be in a political and financial mess, something the election seems more likely to aggravate than improve.
Yet betting against the dollar has been a losing play for years, and that seems unlikely to change.
