Julian Jessop

Ignore the dollar doomsayers

It is still the reserve currency of choice

So, it’s official. The global rating agency S&P has determined that the Russian government has defaulted on part of its international debt. In itself, this is not as big a deal as it may sound. Nonetheless, the circumstances have revived concerns about the future of the US dollar as the reserve asset of choice for central banks around the world.

Russia is now judged to be in ‘selective default’ because it has attempted to repay holders of two US dollar-denominated bonds with Russian roubles. At the very least, this is a technical breach of the terms of the debt. It will also probably lead to some material losses for bondholders, even though the Russian currency has partially recovered from its initial collapse following the invasion of Ukraine.

Even during global crises, the US dollar remains a safe haven

This default does not really matter, for three main reasons. First, it is no surprise. The financial markets had seen it coming and already priced it in. Second, financial institutions have been reducing their exposure to Russia for a long time, especially after the invasion and illegal annexation of the Crimean Peninsula in 2014. Third, Russia is not a big player in international bond markets anyway. Years of huge energy surpluses mean that Russian foreign debt is relatively small and well covered by large reserves of foreign currency – if Russia can access them.

But this is where the wider angle comes in. The fact that western sanctions have made it harder for Russia to service its debts has led some to question whether other countries might go off the US dollar as a reserve asset.

Predictions of the dollar’s imminent demise as the world’s reserve currency have of course been around for decades – and they have consistently been proved wrong.

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