Are U.S. Dollar Reserve Currency Fears Warranted?

There has been a lot of talk about the U.S. dollar after its recent move lower. In fact, the media has highlighted some growing concerns about whether the dollar can remain the world’s reserve currency, especially after comments from former Fed Chair and Treasury Secretary, Janet Yellen.

Yellen said that last week’s dynamic rise in Treasury yields, which occurred simultaneously with the sharp move lower in the dollar, suggests "that investors are beginning to shun dollar-based assets."

While it’s true that the dollar hit its lowest level in three years, it’s important to view this move in context. A look at this chart shows that the dollar has been at or near this same level several times over the last few years, and the dollar was even below these levels pre-pandemic.

Plus, the yellow line representing 10-year Treasury yields shows there are other instances in the past where 10-year yields rose while the dollar declined, meaning last week’s market dynamics were not unprecedented.

Additionally, if the dollar was losing so much of its luster, and there was less demand for 10-year Treasuries, then why was the 10-year Note Auction on April 9 so strong? More importantly, indirect bidders, which represents foreign buyers, accounted for 88% of the auction – the norm over the last year has been 67%. In fact, this was the highest take down by foreigners on record. 

While it’s concerning to see yields higher and the dollar weakening, we don’t feel it’s reason for panic yet. Fifty percent of global transactions are done solely in the dollar, while 89% are done with the dollar on one side of the transaction. It’s way too soon to say that the U.S. is at risk of no longer being the reserve currency, in our opinion.

As Mark Twain famously said, “The reports of my death have been greatly exaggerated.”

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By The MBS Highway Team