New economic policies conducted in the United States could reduce the dollar’s reserve currency role, leading to a depreciation of the dollar, rising long-term interest rates and falling share prices, particularly for technology shares if dominant positions are challenged, according to analysts at Natixis.
Key quotes
“The dollar remains the dominant international reserve currency , and if this status disappeared, the United States would face a serious crisis. The reason is that the dollar's status enables the US to maintain continuous fiscal and external deficits and to finance them without difficulty at a very low interest rate. It should also be pointed out that the US’ attractiveness for non-resident investors concerns not only US Treasuries and bonds, but also equities. The dollar can therefore be said to be a reserve currency for all types of financial assets.”
“A decline of the dollar as an international reserve currency could be the result of economic policies in the US that would discourage foreign investors (in US bonds and equities): A fiscal and monetary policy that would exacerbate the shortfall in savings relative to investment (increase in welfare spending and unfunded public investment, keeping interest rates very low and thereby discouraging savings) and therefore speed up the increase in US external debt; A wage or competition policy that would reduce US companies' profitability and affect the attractiveness of the US equity market for non-residents.”
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