The Dollar Dilemma

Chart of the Week #35

If there’s one thing that seems to occupy President-elect Donald J. Trump’s mind as much as issues like immigration and trade injustices against the U.S., it’s the dollar.

And Trump’s approach to it is nothing if not paradoxical.

On one hand, he seems to prefer a weaker dollar, with advisors like former trade chief Robert Lighthizer suggesting that dollar devaluation could be a key focus in a second Trump administration.

On the other hand, Trump is acutely aware that the dollar's status as the world's reserve currency—America’s golden ticket since World War II—is under serious threat. He’s even threatened 100% tariffs on countries moving away from using the dollar.

Unfortunately for Trump, global central banks currently hold about 58% of their foreign reserves in U.S. dollars. I say unfortunate because, while that might sound impressive, it’s actually the lowest level in over two decades. That’s what this week’s chart below shows. Take a look.

Now, if you’re interested in the historical context, the dollar’s journey as a reserve currency has been anything but smooth. From 1978 to 1991, its share plunged from 85% to 46% (driven by high U.S. inflation in the late 1970s that shattered confidence in the Federal Reserve). Even as inflation cooled in the 1980s, the decline continued.

The 1990s saw renewed confidence and a rebound—until the euro emerged. Since then, apart from a brief uptick in 2014–2016, the dollar’s share has steadily fallen, largely due to China’s shift away from dollar-based trade.

Today, China continues to lead the de-dollarization charge, alongside Russia and other BRICS nations. Through dumping U.S. debt, conducting oil trades in yuan, and promoting its digital currency (e-CNY), Beijing continues to chip away at the dollar's global dominance.

It’ll be interesting to see how this chart looks a couple of years into Trump’s presidency… especially since even in 1991, when the U.S. dollar hit its lowest share of global reserves, it didn’t face the level of opposition it does now from China and other BRICS nations. And also because juggling the conflicting priorities of an ever-weaker dollar and its role as a global reserve currency could pose a tricky dilemma for Trump.

Regards,

Lau Vegys