Investment professionals predict the US dollar could lose its global reserve currency status by 2039.
A new report published by the CFA Institute Research and Policy Centre, reveals significant concerns from investment professionals worldwide about the sustainability of US government finances.
In the report’s foreword, Sheila Bair, former Chair of the Federal Deposit Insurance Corporation and founding chair of the CFA Institute Systemic Risk Council, underscored a growing trend among US political leaders.
Bair commented, “Unfortunately, in the 21st century, the US political leadership has concluded that deficits don't matter.” She explained that both Republicans and Democrats view deficits as the simplest way to fund popular initiatives, avoiding the political challenges of deficit reduction.
Nearly 80 percent of respondents in the survey expressed deep concerns about the sustainability of US government finances, highlighting an increasing reliance on unfunded budget deficits.
Olivier Fines, CFA, head of Advocacy for EMEA at the CFA Institute, emphasized, “[The survey results] signal great concern about the lack of fiscal discipline in the world's largest economy and the potential implications for the role of the US dollar as the preeminent reserve currency, on which global financial stability is still dependent.”
According to survey, two-thirds of respondents predict that the US dollar will lose its reserve currency status within the next 5 to 15 years.
The most common projection from respondents was a transition to a multipolar currency system, while some also believed that a digital currency or a hard currency, such as gold, could replace the US dollar as the dominant global reserve currency.
Paul Andrews, managing director for Research, Advocacy, and Standards at CFA Institute, commented on the privilege the US dollar currently enjoys.
He stated, “Despite historically high leverage and poor budget control, US treasury securities remain the preferred safe haven for liquidity, repayment, and vast cash reserves in global commerce. This is quite a privilege.”
The survey, titled The Dollar's Exorbitant Privilege – CFA Institute Global Survey on the US Debt and the Role of the US Dollar, highlights a notable dichotomy in its findings.
While 59 percent of respondents remain confident that the United States can freely borrow to fund government operations and interest obligations, 77 percent believe that the country’s financial model is not sustainable.
Respondents from developed markets were generally more pessimistic, with 79 percent expressing doubts about the sustainability of US finances, compared to 65 percent from emerging markets.
Moreover, 63 percent of respondents expect the US dollar to lose some of its reserve currency status within the next 5 to 15 years. Among respondents from BRICS countries, this figure rises to 72 percent, with 84 percent in India alone anticipating a shift in the dollar’s global standing.
Concerns regarding the US debt-to-GDP ratio were also prevalent. 61 percent of respondents do not believe that the US will be able to reduce its debt-to-GDP ratio or control deficit spending.
To address these challenges, many suggested that the government cut non-mandatory spending, such as defence, while others recommended reducing mandatory spending on social insurance and healthcare.
Fines further noted, “The United States enjoys unparalleled financial advantages from the dollar's reserve currency status, including lower borrowing costs and larger deficits without immediate repercussions.”
He added that if the reserve currency status were lost, it could lead to higher borrowing costs, difficulties financing deficits, and reduced investment in the US economy.
