Strategists: US Dollar’s Reserve Currency Status Eroding at ‘Alarming Pace’

Asset management firm Eurizon SLJ’s strategists have warned that the erosion of the U.S. dollar’s global reserve currency status has accelerated at an alarming pace in recent years, especially following the onset of the Russia-Ukraine war. They noted that the USD has declined 8% in one year, which is “equivalent to 10 times the average annual pace of erosion in the USD’s market share in the prior years.”

Strategists on the U.S. Dollar Losing Its Global Reserve Currency Status

Eurizon SLJ Asset Management says the U.S. dollar experienced a significant decline as a preferred reserve currency in 2022 despite its continued dominance in international trade. The firm’s strategists Joana Freire and Stephen Jen wrote in a note Monday:

We believe the erosion of the dollar’s reserve currency status has accelerated in recent years at an alarming pace, especially since the start of the Ukraine war.

“The dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions” following the outbreak of the Russia-Ukraine war, the strategists wrote. “Exceptional actions taken by the U.S. and its allies against Russia have startled large reserve-holding countries.” They further noted that Russia became largely isolated from the global financial system after it invaded Ukraine last year, leading the Kremlin to rely more on the Chinese yuan.

The strategists added that the greenback’s share of global reserves has decreased from about two-thirds in 2003 to 55% in 2021 and 47% in the following year, emphasizing:

This 8% decline in one year is exceptional, equivalent to 10 times the average annual pace of erosion in the USD’s market share in the prior years.

Nonetheless, the Eurizon SLJ strategists believe that the USD “will likely continue to enjoy dominance as an international currency for a while longer.” Citing data from the Triennial Central Bank Survey conducted worldwide by the Bank for International Settlements (BIS), published in October last year, they pointed out that the dollar’s share of currency turnover increased from 85% in 2010 to 88% in 2022.

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