US dollar as a global reserve currency is being challenged
The US dollar's status as a global reserve currency refers to foreign central banks and official institutions holding assets denominated in dollars, such as government bonds and securities of US institutions/companies. According to recent data from the International Monetary Fund's COFER, the share of the US dollar as a global reserve currency declined to 58.6% in the fourth quarter and rose to 59.0% in the first quarter of 2023, the lowest level since 1994.
Since the late 1970s when the US experienced a surge in inflation, the world lost confidence in the Federal Reserve's ability to manage inflation. Although inflation subsided in the 1980s, it took a long time for the world to regain trust in the US dollar. During this period, the dollar's share rebounded until the emergence of the euro halted the rebound. Since then, the euro has become the undisputed second-largest global reserve currency, with a share of around 20%.
In response to ongoing inflation concerns and other economic challenges, the Federal Reserve has expressed an open attitude towards further interest rate hikes after the expected hike this month. While policymakers and officials at the Federal Reserve have been encouraged by the recent easing of price pressures, they are not inclined to declare an end to the fight against inflation, as they are keen to avoid a repeat of the 1970s.
Market participants and investors widely expect a 25-basis-point interest rate hike at the Federal Reserve's meeting on July 25-26, which would mark the final rate hike in this current tightening cycle. In the past week, stock and bond prices have risen on these expectations, with the yield on US two-year Treasury bonds declining.
Since the late 1970s when the US experienced a surge in inflation, the world lost confidence in the Federal Reserve's ability to manage inflation. Although inflation subsided in the 1980s, it took a long time for the world to regain trust in the US dollar. During this period, the dollar's share rebounded until the emergence of the euro halted the rebound. Since then, the euro has become the undisputed second-largest global reserve currency, with a share of around 20%.
In response to ongoing inflation concerns and other economic challenges, the Federal Reserve has expressed an open attitude towards further interest rate hikes after the expected hike this month. While policymakers and officials at the Federal Reserve have been encouraged by the recent easing of price pressures, they are not inclined to declare an end to the fight against inflation, as they are keen to avoid a repeat of the 1970s.
Market participants and investors widely expect a 25-basis-point interest rate hike at the Federal Reserve's meeting on July 25-26, which would mark the final rate hike in this current tightening cycle. In the past week, stock and bond prices have risen on these expectations, with the yield on US two-year Treasury bonds declining.