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  • Mathieu Provencher

Is the USD Losing Its Edge?

Updated: Mar 27, 2020

(picture taken from Wix's library)

Hello Everyone!

Most Economists agree that the USD is still the reserve currency of choice in the world. Most Central Banks hold it and indeed need it. Most trade is still made using USD and that place has not yet been challenged significantly.

However, I argue that the USD is not seen as “safe” as it once was. To be a safe haven currency (or asset), investors need to see it as a store of value in times of economic uncertainty.

Gold seems to possess that attribute: in times of international crises caused by market crashes (such as the great recession and the great depression), war around important commodities (such as oil), and political frictions between important international traders (such as the USA and China), amongst other things, gold tends to gain value while other assets tend to lose value.

Showing the safe haven status of a currency is a bit trickier.

If anything significant were to happen in the country of that currency, the value of it will change regardless of its status (safe haven or not). Unfortunately for us, most important international economic shocks in the past 20 years started in (or were strongly linked to) the USA, which makes it difficult to see if investors would really buy USD in times of uncertainty (because that uncertainty came from the USA).

As such, I propose an alternative strategy: Let’s observe a period of time that affected the USA as well as two other countries I expect may replace the USD as safe haven currencies: Japan and Switzerland (let’s add the Euro although the Swiss Franc was pegged to it up until 2015).

For as far as I can tell, the 2000 dotcom bubble burst affected the USA, Japan, Switzerland, and the Eurozone fairly similarly (regarding Real GDP and Unemployment). Let’s add in the period after that as well as the Great Recession for more data. That gives us a good control to see if indeed investors fled to gold and the USD in times of uncertainty.

Although the 2000 dotcom crisis did not have a great impact on Real GDP and Unemployment of those countries, it did have a significant negative impact on both consumer and business confidence of OECD countries (as found on the OECD website). For the Great Recession, I think we all agree that it had a significant impact on those measures.

We thus have two international economic shocks that brought uncertainty to all three markets (USA, Japan, and Europe). If the USD is still the safe haven currency of the world, it should gain value when compared to most other currencies. If all four currencies (USD, Yen, Franc, and Euro) are equally “safe”, their value should stay relatively stable when compared to each other. If gold is indeed a safe haven asset, its value should increase right after the dotcom bubble and after the Great Recession.

As you can see in the graph below, gold gained substantial value (in real terms) during that period while the USD lost substantial value against the Yen, the Franc, and the Euro. The price of gold can indeed change for reasons other than uncertainty but I would argue that important changes in its value are often due to angst (which seems to be an important part of the equation here).

If the USD is a safe haven currency, why did it lose so much value compared to those other currencies during that period of uncertainty? Why is its value inversely correlated to gold? After 2012, when economies were recovering from the Great Recession and some stability was coming back to international markets, a reduction in the value of gold can be seen. During the same period, we can see a stabilisation (and even an increase) in the value of the USD against those other currencies. That may be investors leaving safe haven assets to return to more risky ones.

(Sources: Exchange rates found at the World Development Indicators. * Japan's exchange rate divided by 100 for convenience of presentation; Gold price (adjusted for inflation) per ounce found at

Please note that some other event might also have influenced the price of these assets. Economics is in an unfortunate situation in which a lot of things change at the same time… all the time. However, this data fits so well the dotcom bubble burst and the Great Depression (as well as its recovery) that I have very little doubt that the main economic event at play is indeed international uncertainty.

In this article, I am not arguing that the USD has completely lost its position in the world as a reserve and safe haven currency. I am, however, inclined to believe that the USD is not the safe haven currency it was in the second half of the 20th century.

In my view, the USD is becoming less relevant than before because of a few events all lining up nicely: the potential death of petrodollars as a mean of exchange with oil producing countries, a possible new exchange mechanism with Europe not based on the USD (introduced because of the current Iranian crisis, let’s see if it develops further), countries stocking up on gold and avoiding USD (Russia being an important one), USA government shut-downs and possible defaults on their bond obligations (that’s a bit far fetched but that was a real worry not so long ago), and finally a change in international relations with the USA, possibly leading to more economic isolation if things go the wrong way.

That’s what I see when looking at the value of gold and the exchange rates for that timeline.

I hope you guys learnt a few things, take really good care of yourselves and have a great time!

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