Fed Chairman Powell elaborates on the U.S. dollar hegemony: the public firmly believes in the value storage of the dollar, threats such as digital currencies are unlikely to shake its dominant position.

In the face of the actively developing digital euro and China's Digital Currency Electronic Payment (DCEP), the Federal Reserve of the United States seems unfazed. In a report released on 10/6, the Fed analyzed the current international status of the US dollar and its foreign exchange reserves, believing that these threats will still find it challenging to challenge the dominant position of the US dollar in the near future.

The Fed acknowledged the risks the US dollar faces in its international status in the report, including EU financial integration, China's rise, and the development of private sector and official digital currencies. However, it also presented a lot of data to emphasize the absolute dominance of the US dollar.

The International Role of the US Dollar

The chart below shows the performance of the United States as of the fourth quarter of last year, accounting for 24.8% of global GDP, with the U.S. dollar making up 59% of foreign exchange reserves.

The Federal Reserve believes that the U.S. dollar plays a significant role internationally based on most measurement data. While the dominant position of the U.S. dollar should not be taken for granted, discussions about issues such as the possible erosion of its dominance need not be further debated.

Public Confidence in the U.S. Dollar as a Store of Value

Whether a currency is a reliable store of value can be referenced through the situation of foreign exchange reserves. In 2021, the U.S. dollar accounted for 60% of global foreign exchange reserves, although lower than the 71% in 2000, it still far exceeds other currencies:

• Euro 21%
• Japanese Yen 6%
• British Pound 5%
• Chinese Yuan 2%

The Federal Reserve also emphasizes that the decrease in the percentage of the U.S. dollar is distributed among various currencies rather than a single currency. The majority of U.S. dollar reserves are held in the form of U.S. Treasury securities, with the following distribution:

• 33% held by official and foreign private investors
• 42% held by private domestic investors
• 25% held by the Federal Reserve System

Dominant Position of the U.S. Dollar in International Trade and Financial Markets

Research on various global trade and international financial transactions also indicates the dominant position of the U.S. dollar internationally, with the percentage of the U.S. dollar in global trade invoices as follows:

• Americas trade: 96%
• Asia-Pacific region: 74%
• Other regions: 79%

The only exception is the Euro's dominance in Europe.

The percentage of foreign currency debt denominated in U.S. dollars has remained around 60% since 2010, as shown in the chart below, with the U.S. dollar far ahead of the Euro at 23%.

Steadfast Position of the U.S. Dollar in the Past 20 Years

The Federal Reserve's report concludes the use of the U.S. dollar over the past 20 years and quantifies the usage of various national currencies with a composite index, consisting of the following weights:

• 25%: Foreign exchange reserves
• 25%: Foreign exchange trading volume
• 25%: Foreign currency debt issuance
• 12.5%: Foreign, international bank claims
• 12.5%: Foreign, international bank liabilities

Since the global financial crisis in 2008, the level of the U.S. dollar index has remained stable at around 75, far ahead of all currencies, with the Euro, the second-ranking currency, at only 25.

Short-Term Stability of the U.S. Dollar's Position

The Federal Reserve concludes that recent threats to the U.S. dollar's dominant position seem very limited. Throughout modern history, there has been only one instance of the "dollar replacing the pound." However, certain developments may promote the adoption of other currencies, including:

• European integration process, development of digital Euro
• Rapid rise of China, surpassing the U.S. in GDP, becoming the world's largest exporter
• Development of private and official digital currencies, changes in the payment industry

Nevertheless, the Federal Reserve believes that the Renminbi (RMB) may not be attractive to foreign investors due to factors such as foreign exchange controls and lack of trust in the Chinese Communist Party. Additionally, digital currencies are difficult to change the global landscape solely through technological modifications.

The Federal Reserve emphasizes that without any significant political or economic changes, the reasons mentioned above are unlikely to shake the U.S. dollar's value as a store of value and medium of exchange. Therefore, the U.S. dollar is highly likely to maintain its dominant position globally in the near future.