Can US dollar lose its status?

Since the financial crisis of 2008, lot many experts and market participants expressed negative views over the dollar's status as the world's premiere and preferred currency over the rise of challengers namely Chinese Yuan. Some expressed that it might also lose its reserve status as most preferred.

Our view remains to the contrary.

Why?

Past experience -

• In 2000, with the rise of Euro, many expressed the same concerns and views over the sharp rise of Euro as a reserve when its share rose from just 17% in 2000 to 25% by 2002 end.

• However since the financial crisis Euro's share has fallen to just around 22% compared to 28% during peak.

Hard facts -

• In spite of the challenges and loosing share dollar's share is still around 62% in world reserve.

Liquidity haven -

• US dollar has a status of liquidity haven. In the event of extreme risk aversion, there are no alternatives. In the currency market one is trading either pro dollar or anti dollar.

OTC derivative market -

• OTC derivative market is huge. Global total notional outstanding is around $ 700 trillion.

• Two important product categories are Interest rate swap and FX swap. The share of dollar in that segment is respectively 31% and 87% as per latest BIS estimate.

Consumption -

• US are world's largest consumer. GDP of US stands around $ 17 trillion. To export to the consumer need to transact in dollar.

Bond market -

• Central Banks and real money participants do not hold cash or derivatives and US has huge amount of debt.
  
  
• US govt. bond market is the largest as debt runs in $ 18 trillion.

Commodity quotation -

• Important raw materials benchmark prices are all quoted in dollar namely Gold, Silver, Platinum, Crude oil, and Base metals etc.

Recent development -

Many have posed similar doubts as dollar value rose against most countries' currencies.

• US dollar index rose from 68 in 2011 to 100 today. This appreciation is further more the reason producers would prefer dollar as the return is higher after conversion as commodity prices remain depressed. Hard facts show dollar transactions rose in its share to 43.4% in January 2015 compared to 38.7% for similar period last year. Yuan transaction remained small at 2.06%.

• Interest rates are rising in USD securities that are to benefit dollar not only in strength but appeal. Real money managers across Reserve banks, pension funds, sovereign wealth funds, insurance funds have started pouring in money in USD securities. Due to ECB action European equities experienced nearly $20 billion fund flow this year far lesser than $ 50 billion for US bond funds.