Thank you for your excellent service. Can you please share your views about the US Dollar’s reserve currency status and future in view of the fact that the US seems to want to isolate itself from the world? How likely do you think they will indeed isolate themselves, and what would be the consequences to the status of the USD as a reserve currency. Thanks in adv. best regards.

Eoin Treacy's view

Thank you for this question which is sure to be of interest to other subscribers.  The Dollar is the world’s reserve currency for a number of reasons. It is backed by the strength of the world’s largest economy. It is backed by the world’s most well-funded military. Oil prices are denominated in Dollars but more important that any of these factors is that its reserve status is backed by the consumption of the USA’s population. 

I believe the only thing that could change the US Dollar’s reserve status is if the USA decided to consistently run trade surpluses while another major currency bloc like the Eurozone or China was willing to run trade deficits. The reason is simple enough. If you want to have the world’s reserve currency you need to print lots of it, so it can be used for transactions all over the world. The easy way to get it out into the world is to use it for purchases of goods and services from overseas and by loaning it to credit worthy borrowers everywhere. That means you have to run deficits. Neither Europe nor China has much appetite for running trade deficits, rather the opposite, so there is little threat to the US Dollar’s reserve status. 

Nevertheless there are serious repercussions from the trend of US isolationism that began with Barack Obama’s presidency. The US public has little patience for trillions being spent on “nation building” and thousands of young soldiers coming home in body bags when living standards have been static for a decade and the growth that has been delivered since the credit crisis has been uneven at best. 

The fact the USA is now exporting oil and gas after a 41-years hiatus highlights the fact it is less dependent on energy market stability than at any time since the 1970s. From a geopolitical perspective the low price of oil is a benefit for the USA since it damages the ability of a significant number of global competitors from performing effectively. It also means the country has less need to be such a strong supporter of energy exporting regimes. 

The more recent trend of adopting a more aggressive tone with historic OECD allies by demanding greater defence spending and better terms of trade is a further iteration of the original move towards isolationism a decade ago in my view.  I don’t believe this will result in the USA pulling back from participation in the global economy but it does mean it is going to be pickier in what it signs up to and will be more mercantilist in the terms of trade it demands. There is little chance of it suddenly becoming a creditor nation in the short to medium-term. 

Long-term the trend of technological innovation is towards a greater influence of data on growth with energy declining in importance. $15000 seems to be the magic number in terms of the role energy demand growth has on GDP per capita with the USA crossing that point in the mid 1970s when energy intensity per capita peaked. Data is not an extractive sector resource and the growth of the digital economy has significant potential to upend the geopolitical world order which in many respects has been shaped by energy supply and demand.  I believe that theme has more potential than any other to significantly shape the development of the global economy over the coming decades.