The COVID-19 pandemic triggered such an aggressive monetary and fiscal response from the United States that immediately called for the demise of the dollar. Logic tells us that if new money is issued so quickly and in such big quantities (i.e., over 25% of all dollars ever created appeared in response to the pandemic), a currency debasement follows.
Examples are everywhere. Dollar permabears like to point to Venezuela, Turkey, Argentina, etc., as classic examples of money-losing value fast.
They are right; just have a look at Turkey. Over the weekend, the country’s President fired the central bank’s head in a move that sent the lira, the local currency, on a death spiral. The move is strong enough to influence all financial markets because of the increased role of emerging markets in investors’ portfolios.
However, one cannot use the above examples when talking about the U.S. and the dollar. The counterargument is that there is simply no rival for the dollar’s role as the world’s reserve currency.
U.S. Dollar’s Share in International Reserves Rose During the Pandemic
It is easy to point to inflation and currency debasement without knowledge of what happens in reality. Not only that the dollar did not lose its status, but it strengthened its reserve status during the pandemic.
That is, despite the massive printing and issuing from the Fed and the Treasury, foreign nations increased their exposure to the dollar during the pandemic. More precisely, faced with the option of choosing another currency to keep their excess reserves, foreign nations relied on the dollar.
All other candidates (e.g., euro) have seen their share declining, despite outperforming the dollar in the markets for most of 2020 and 2021 so far. In other words, despite the EURUSD exchange rate jumping from 1.06 to 1.23 during the pandemic, the move higher did not trigger fears of the dollar losing its reserve status – just the opposite. We may say that sovereign nations used the dollar’s weakness to build up their reserves at better levels.
Last week’s Fed decision revealed the fact that the Fed wants to remain accommodative despite signs of economic recovery. Yet, the market pushes the Fed to the wall as the yields are rising, and a first rate hike is already priced as soon as December 2022.
There is no other central bank in the advanced world to think of thinking of hiking in the near future. Hence, the dollar’s strength should not surprise anyone as long as it is still the dominant choice when building up reserves.