Is the USD really at risk? - Commerzbank

There's the danger that the US government's imposition of sanctions via the US Dollar (USD) as the world's leading currency could cast doubt on its status if the countries that use the USD as an international transaction medium no longer support such US sanctions. But is the USD really at risk? The current weakness of the USD is readily equated with growing doubts about its status as a leading transaction currency, however, a depreciation of the USD does not necessarily have to go hand in hand with this, Commerzbank's FX analyst Antje Praefcke notes.

No alternative to the USD for now

"In the 2000s, there was a phase in which the USD depreciated sharply without its status as a reserve currency being called into question. I would just like to remind you that at the beginning of the year, many clients were asking us whether and when EUR/USD would reach parity. The USD's depreciation of almost 15% since then is certainly remarkable in terms of its speed. But the new US president has also done his best to unsettle the markets, whether with his erratic tariff, economic and foreign policies or his attacks on the Fed."

"However, if we look at purchasing power parity, the USD remains highly valued despite its depreciation since the beginning of the year. It is therefore possible that Trump's policies were primarily a trigger for a correction of the USD's overvaluation, which was based, among other things, on the exceptionalism of the US economy. Conversely, this would mean that future US administrations could correct the mistakes or missteps of the Trump administration and thus restore the previous status quo of US economic outperformance - and possibly also strengthen the USD by restoring market confidence in its status."

"Many may not like the idea, but ultimately the US capital market continues to offer all these characteristics, whereas potential alternatives (be it the euro, the renminbi or a common BRICS currency that does not yet exist) lack one or more of these characteristics. Apart from the willingness of a country or currency area to accept a permanently large current account deficit in order to provide the world with the reserve currency or means of transaction, while at the same time avoiding a balance of payments crisis. Despite everything, even with its current weakness, I currently see no alternative to the USD as the reserve currency and international means of transaction."