Inflation terrifies people for a lot of reasons, including its erosion of the purchasing power of wages and the value of dollar-denominated debt. But in May, a leading foreign exchange trader named Stanley Druckenmiller warned of an even bigger long-term risk of inflation: That it might threaten the U.S. dollar’s status as the world’s dominant “reserve currency”.
The U.S. dollar $ is overwhelmingly the preferred currency for international trade — just think for instance to the huge global oil trade is dollar-denominated and settled. The dollar is also the most widely held foreign currency in central banks.
This produces major economic benefits for Americans — which represent an enormous privilege for them, both holders and beneficiaries of the U.S. dollar — and its decline could harm the U.S. economy.
We’re still miles away from the kind of hyperinflation that can truly wreak havoc on both the currency or the economy, as shown in the real-life cases around the world in countries such as Lebanon (144.1%), Venezuela (1743%), and Argentina (50%) just to mention a few, and the most acute cases of hyperinflation recorded to this day.
There’s also a lot of evidence that current U.S. inflation is highly concentrated in a few sectors, and bond investors have remained stubbornly and tenaciously skeptical about inflation being just ‘transitory’, despite concerns of its higher-than-expected rates.
But whether inflation pushes things along or not, it’s clear the dollar’s reserve status is already under pressure.