LONDON, April 19 (Reuters) - One by one, scenarios of a dollar demise are getting batted away yet again.
A source of currency market hand-wringing for decades, tales of the dollar's decline as the dominant world currency are nothing new. And they mostly founder on the lack of a serious credible alternative or the resilience of the U.S. economy and the openness, sheer scale and liquidity of its asset markets.
While the exchange rate of the greenback ebbs and flows with relative interest rate cycles - and it's surging again this year as the Federal Reserve hangs tough on its 'higher-for-longer' policy stance - the many theses surrounding a possible dollar sunset are more structural fears about America's standing.
Lists of supposed threats over 30 years or more are long: the euro's arrival, yawning U.S. balance of payments gaps, the rise of China, the 2008 banking collapse and subsequent Fed money printing, and even the emergence of cryptocurrencies.
But the most recent iteration centres on geopolitical and trade polarization since the pandemic hit in 2020 and Russia invaded Ukraine in 2022.
That riffs on the idea that an alternative China/Russia-led bloc of big emerging powers would redraw the strategic map and sideswipe American hegemony by proposing less use of the dollar in global finance and savings.
And one aspect of that argument is that extensive use of U.S. financial sanctions via control of dollar access - most dramatically in the freezing of Russian central bank reserves parked in overseas markets - would see other countries rush to relocate their savings for fear of something similar in future.
Two years on and that dog hasn't barked yet - at least not loudly.
In an annual HSBC-sponsored Central Banking magazine survey of global central bank reserve managers released this week, only 13 of 79 central banks cited shaky geopolitics as their biggest concern and 75% said gradual 'de-dollarisation' of reserves would not accelerate.
The latest International Monetary Fund statistics on world reserves at the end of 2023 backs that up and showed little change in the structure of FX reserve holdings last year.
Even though the share of dollars in the $12.3 trillion of global reserves edged down a fraction - ING's currency analysts point out that when adjusted for currency valuation effects the overall share of dollar holdings actually nudged 0.2 percentage point higher to 58.4% - a first such rise since 2015.
Perhaps in part because the lion's share of frozen Russian reserves were likely held in European currencies, the euro's share of world reserves actually fell almost a point to 20%.
And most surprisingly of all, the share of Chinese yuan - touted for years by some as the likely big winner from any shift from the buck - actually ebbed for the second year in a row to just 2.3%.
"China's '3D challenge' of debt, deflation and demographics will limit yuan's international appeal," Morgan Stanley said on Thursday in a deep-dive report into what it sees an enduring dominance for dollar's reserve role.
What's more, the lack of full yuan convertibility and more limited access to Chinese capital markets - where the total bond market size is still less than half that of the United States and its stock market capitalization is just a fifth of it - limits its use.
OVERBLOWN?
Reserve trends aren't everything of course.
But the Morgan Stanley report highlighted the sheer scale of the dollar's persistent dominance elsewhere too.
The U.S. currency last year accounted for 44% of world trade flows - up 7 percentage points over the prior decade. It made up 44% of currency market turnover, 50% of cross-border banking claims, 60% of foreign currency corporate debt and some 65% of emerging market external debt.
To be sure, the redrawing of the global trade maps over the past three years has also been pored over as a potential source of structural dollar weakness to come.
But the seismic geopolitical shifts that are leading to 'onshoring' of key supply chains or pumped-up energy and commodity prices are not necessarily dollar negatives.
For one, the domestic shale oil boom that renders the U.S. virtually self-sufficient in energy may not keep a lid on restive oil prices in the event of global disruptions - but it's having less of an impact on the U.S. external balance of payments gaps that have long acted as a threat to the dollar over time.
In fact, the dollar may now be behaving as something of a petro currency during those geopolitical shocks in way it hadn't done for decades - adding to its traditional 'haven' role in times of times of stress due the liquidity and ubiquity of dollar assets.
Societe Generale's currency strategist Kit Juckes said this week that it's safe to assume for the foreseeable future that higher oil prices will lift the dollar against the yen and euro at least.
And, as the IMF's latest forecasts this week show, the out-performance of the U.S. economy versus G7 peers over 2023 and 2024 comes as its current account deficit as a share of overall output is actually narrowing - unlike in previous decades when a relatively fast-growing U.S. economy sucked in far more imports than the exports it could sell overseas.
"A combination of trade and energy policies is changing the growth/balance of payments trade-off," wrote Juckes.
For many, the structural worries around the dollar and its global status often just infect forecasting of exchange rate moves excessively. And this in turn leads to the sort of confounded pessimism evident again this year when the dollar's value surges anew against the consensus on a hardline Fed.
There are valid risks: a divisive election ahead, domestic fiscal worries and debt management issues and many global uncertainties, Morgan Stanley's team noted.
"But we think that investment theses chiefly based on the notion that the dollar will lose its 'dominant currency' status are likely overblown."
The opinions expressed here are those of the author, a columnist for Reuters.
(Reporting by Mike Dolan; editing by Jonathan Oatis)
