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The Dollar’s Reserves of Strength

The US-China trade war and the recent freezing of much of Russia’s official foreign-exchange reserves have again raised fears of an exodus from the dollar. But no one should write the greenback’s obituary just yet.

LONDON – The freezing of much of Russia’s official foreign reserves has inevitably led some again to predict the imminent demise of the dollar’s “exorbitant privilege” as the world’s reserve currency of choice. But we should not write the greenback’s obituary just yet.

On its own, the sanctioning of Russia’s reserves will likely reinforce the primacy of the dollar as the backbone of the fiat currency system. Only if the United States were regularly to use such financial sanctions as an offensive foreign-policy weapon might a more rapid erosion in the dollar’s status occur.

True, in the past four years – a period marked by a US-China trade war and the COVID-19 pandemic – the dollar has accounted for only 40% of new reserve accumulation, compared to 23% for the euro. The Chinese renminbi’s share of new reserves has jumped to 10%, while the Japanese yen and British pound have gained ground as well.

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