There are almost bubbles everywhere you look but you also cannot see them bursting anytime soon. The massive liquidity injected by almost every single central bank to stave off the economic ill effects from the pandemic has ensured a superfluous liquidity situation. It is well known that the US dollar is the most important currency for central banks with the US dollar accounting for about 59% of Forex reserves. The US dollar is involved in about 85% of all Forex transactions and is therefore the most important currency for international trade.
Special Drawing Rights is an international reserve asset which the IMF allocates to its member countries. However, it is not at present a currency in its own right. Rather, it confers upon the holder a “right to draw” currency issued by any of the IMF’s member countries.
Originally linked to gold, SDR’s value now is determined by a basket of five currencies—USD, the euro, the Japanese yen, the British pound, and the Chinese renminbi. Since SDR is a reserve asset, not a currency, it also bears interest. The interest rate on SDR is determined in relation to the interest rates on safe assets denominated in the currencies of SDR’s basket.
Investors should be aware that very little is entirely certain in finance. Should demand for the US dollar weaken, then the currency would suffer devaluation. Investors should therefore pay attention to factors that could weaken the dollar and/or decrease demand for the dollar. On the one hand, dollar debtors, including sovereign funds and corporations, would be happy to see a devalued dollar since that would mean that servicing their dollar debt would cost less and the principal to repay would be much less as wellThe economic recovery now underway in the US is not going to change the penchant for deficit spending, and the Fed is planning on keeping interest rates low. One real problem that has to be faced is the growing inflation in the US. That may well lead to de facto dollar devaluation.