The US dollar continues to dominate the global currency landscape as we begin 2025, defying widespread expectations of its decline despite growing concerns about the $38 trillion US debt and international efforts to reduce reliance on the dollar, according to Jardini Research.
While the dollar has fallen 12% against the euro this year and declined by less than 1% against the yen, research suggests that these losses represent a correction and not the start of a sustained downward trend.
The dollar's resilience becomes clear when examining the key weaknesses of its rivals in the International Monetary Fund's Special Drawing Rights (SDR) basket of reserve currencies.
The euro, which accounts for only about 20% of global reserves, faces structural constraints that prevent it from challenging the dominance of the dollar.
The 20 countries that use the euro refused to enter into a robust fiscal union to complement their monetary union, leaving Europe without a single debt instrument to compete with US Treasury bonds. This fragmentation underscores the unparalleled depth and liquidity offered by US markets, the brokerage firm added.
The Japanese yen presents its own challenges as a reserve currency. Despite expectations that the Bank of Japan will tighten monetary policy for the second time this year on December 19, the currency faces headwinds from Japan's efforts to avoid recession and Prime Minister Sanae Takaichi's economic strategy, which relies on a weak exchange rate. These factors have kept yen bulls on the sidelines.
The British pound has struggled in the aftermath of Britain's exit from the European Union, with the world's sixth-largest economy unable to stabilize its finances.
Three years after then-Prime Minister Liz Truss's policies nearly broke the bond market, current leader Keir Starmer is defending speculation that Britain may need a bailout from the International Monetary Fund.
The brokerage firm said that with bond custodians watching every move by Treasury Secretary Rachel Reeves, the pound is hardly reflecting the stability expected of a safe-haven currency.
The Chinese yuan, despite President Xi Jinping’s goal of elevating it to the status of a major reserve currency, remains not fully convertible.
The People's Bank of China lacks independence, and the fundamentals of the national economy remain troubled by a seemingly endless real estate crisis that is generating deflation, according to analysts.
The dollar's dominance reflects what Jardini's research describes as a beauty contest where the winner is not the most beautiful contestant but the one with the fewest flaws.
The dollar still accounts for about 60% of central bank reserves, remains the primary instrument in import and export bills, and dominates global corporate borrowing.
The brokerage firm acknowledges the risks threatening the dollar's status. US inflation is around 3.0%, which is above ideal. The country no longer holds AAA credit ratings.
President Donald Trump’s tariff plans and the potential trade war are creating uncertainty, especially given that China’s trade surplus in goods has exceeded $1 trillion for the first time in just 11 months this year.
Additional concerns include Trump's disapproval of Federal Reserve Chairman Jerome Powell and occasional threats to devalue the dollar.
However, long positions borrowing in low-yielding yen or Swiss francs are set to end 2025 favoring bets on a strong dollar. De-dollarization efforts by China, Saudi Arabia, and other developing nations have met with limited success.
Unpegging the dollar would be a longer, more costly, and more turbulent process than even most adversaries might be willing to attempt, Yardney adds.
