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How Dominant is the U.S. Dollar?

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U.S. Dollar Dominance

How Dominant is the U.S. Dollar?

The U.S. dollar has been the world’s dominant currency since the end of World War II.

According to the Congressional Research Service, roughly half of international trade, international loans, and global debt securities are denominated in USD. The same goes for many of the world’s most important commodities including gold, silver, and crude oil.

In this Markets in a Minute chart from New York Life Investments, we provide a snapshot of the U.S. dollar’s global standing.

The World’s Most Traded Currency Pairs

The foreign exchange market is the largest financial market in the world, with an average daily trading volume of almost $7 trillion. The majority of this volume is driven by banks, corporations, and other financial institutions.

More than 70% of this volume is generated from the top seven currency pairs, all of which involve the U.S. dollar.

Currency PairShare of Global Transactions
EUR/USD27%
USD/JPY13%
GBP/USD11%
AUD/USD6%
USD/CAD5%
USD/CHF5%
NZD/USD4%
EUR/JPY4%
GBP/JPY4%
Other21%

Figures may not add to 100% due to rounding.

The EUR/USD pair is the world’s most traded currency pair and is commonly referred to as “fiber”. It indicates how many U.S. dollars are needed to purchase one euro.

Foreign Exchange Reserves by Currency

Central banks typically hold foreign exchange reserves for purposes such as:

  • Influencing exchange rates
  • Maintaining liquidity in the event of a crisis
  • Backing debt obligations

Given its status as the world’s dominant currency, the USD naturally represents a majority of these reserves.

CurrencyShare of Total Reserves
US dollar60%
Euro21%
Japanese Yen6%
Pound sterling5%
Chinese renminbi3%
Australian dollar2%
Canadian dollar2%
Other3%

Figures may not add to 100% due to rounding.

Japan and China are the world’s largest foreign holders of USD, with stockpiles of over one trillion each. These are often accumulated by purchasing U.S. Treasury bonds, a strategy for devaluing one’s domestic currency.

Because a large portion of China’s GDP is generated from exports, the country benefits when its currency, the renminbi (RMB), is weaker relative to the dollar. A relatively weak RMB means Chinese exports become cheaper than American-made goods.

How Long Will The U.S. Dollar Reign?

Today’s shifting geopolitical and economic landscape presents challenges to the U.S. dollar’s global status.

China has overtaken the U.S. as the world’s major trading partner, and is looking to leverage its power to expand the presence of the RMB. Two factors that limit the RMB’s potential as an international currency are tight government controls and a lack of transparency.

Another threat to the USD’s dominance is the use of financial sanctions, which limit foreign access to the U.S. financial system. While these sanctions may be effective from a foreign policy perspective, they can also undermine the global role of the USD.

The following chart illustrates how Russia has circumvented the U.S. dollar in the face of American sanctions.

Russian Exports Currency Composition

More specifically, Russia and China have been working towards a closer financial alliance. As of Q1 2020, just 45% of trade between the two nations was denominated in USD, down from 90% in late 2015.

What About Inflation?

America’s M2 money supply has grown significantly since the 2008 global financial crisis, and even more so during the COVID-19 pandemic. M2 includes cash, checking deposits, and liquid vehicles such as money market securities.

Looking forward, U.S. inflation is expected to accelerate. In August 2020, the Federal Reserve announced it would switch to an inflation-averaging policy. This means that annual inflation will be allowed to exceed 2% in a given year, so long as the 2% target is achieved over a longer timeframe.

In some respects, higher inflation can be a positive. The U.S. debt to GDP ratio is currently over 100%, and by 2050, it’s expected to reach 195%. With so much debt being issued, sustained inflation can gradually undermine the real value of these liabilities. The tradeoff, of course, is a further weakening of the U.S. dollar.

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Markets in a Minute

Data Centers: Investing in the Infrastructure of the Future

Infrastructure refers to any asset that provides an essential service. In today’s interconnected world, data centers are exactly that.

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Data Centers

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Data Centers: Investing in the Infrastructure of the Future

Digital transformation is one of the world’s most prominent trends today.

For evidence, consider the growth in internet users worldwide. By 2023, 5.3 billion people (66% of population) will be using the internet, up from 3.9 billion (51% of population) in 2018.

This growth has resulted in an incredible amount of data being produced each day, whether its from streaming music on Spotify or buying goods on Amazon. But how is all this data being processed?

In this Markets in a Minute chart from New York Life Investments, we shed light on the importance of data centers, and why they should be considered as core infrastructure.

The Role of the Data Center

A data center is a facility that stores, processes, and disseminates data. There are thousands of them around the world, and collectively, they’re referred to as the “cloud”.

This puts data centers at the center of nearly everything we do online: e-commerce, communications, storage and back-up, and even online gaming. To gain a better sense of what this all looks like, the following table breaks down the storage capacity of the world’s data centers.

Segment2016 Storage Capacity (exabytes)2021 Storage Capacity (exabytes) 
Compute160470
Collaboration170400
Database & analytics150380
Enterprise resource planning180420
Video streaming50180
Social networking60160
Search engine30100
Other consumer apps70190
Total8702,300

Source: Statista (2021)

One exabyte is equal to one billion gigabytes, which means the world currently has 2.3 trillion gigabytes of total storage.

The largest segment is compute instances, which are cloud-based workstations used by data scientists. At the lower end of the scale are segments like video streaming (includes Netflix and Hulu) and social networking (think Facebook or LinkedIn).

Cloud Spending Reaches a Historic Milestone

For businesses that create and use data, moving to the cloud (as opposed to maintaining their own servers) has plenty of advantages like cost savings, flexibility, and security.

This is driving exponential growth in cloud infrastructure spending, which reached a record $130 billion in 2020. At the same time, spending on data center hardware decreased from $96 to $90 billion. These results are partly attributed to COVID-19, which forced many businesses to switch to a work-from-home operating model.

A survey conducted by 451 Research found that 40% of businesses had increased their usage of cloud services during the pandemic. In addition, 85% of those who were impacted indicated that the move would be a permanent one.

Data Centers are Infrastrcture

The scope of an infrastructure investor has historically been limited to companies in construction, energy, and transportation.

But what defines infrastructure?

It’s any physical system that is vital for an economy’s development and prosperity—and in a world where over 5 billion people are expected to be online by 2023, the data center is the perfect embodiment of that.

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Sustainable Investing Assets Worldwide (2018-2020)

From 2018-2020, global sustainable investing assets grew by 15% to reach $35.3 trillion. Here’s how they break down across five major markets.

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Sustainable Investing

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Sustainable Investing Assets Worldwide (2018-2020)

Sustainable investing is top-of-mind for many investors, but how fast is it actually growing?

Between 2018 and 2020, global sustainable investing assets grew 15% to reach $35.3 trillion. This works out to more than a third of total assets under management.

In this Markets in a Minute from New York Life Investments, we explore the value and growth of sustainable investing assets across five major markets.

What is Sustainable Investing?

Sustainable investing considers environmental, social, and governance (ESG) factors in portfolio selection and management. For the purposes of this data, it is a broad definition that includes seven main approaches:

  • ESG integration
  • Corporate engagement & shareholder action
  • Norms-based screening
  • Negative/exclusionary screening
  • Best-in-class/positive screening
  • Sustainability themed/thematic investing
  • Impact and community investing

In most regions, it is becoming increasingly common to combine several of the above strategies within the same product.

Sustainable Investing Assets by Region

Sustainable investment data comes from five major markets: the U.S., Europe, Japan, Canada, and Australasia. Currencies have been converted to U.S. dollars at the prevailing exchange rate at the day of reporting. We’ve based growth rates on U.S. dollar values.

Here is the value of sustainable investing assets in U.S dollars, sorted by asset amounts in 2020.

Region20182020Growth Rate
United States$12.0T$17.1T42%
Europe$14.1T$12.0T-15%
Japan$2.2T$2.9T32%
Canada$1.7T$2.4T43%
Australasia$734B$906B23%

All 2020 assets are reported as of December 31, 2019 except for Japan which reports as of March 31, 2020. Australasia is Australia and New Zealand. In 2020, Europe includes: Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Italy, Spain, Netherlands, Poland, Portugal, Slovenia, Sweden, the UK, Norway, Switzerland, and Liechtenstein.

The U.S. makes up almost half of global sustainable investment assets, and saw the second highest growth rate. One strong theme in the country is racial justice investing. Over 120 investors and organizations signed a call to action for the investment community to dismantle systemic racism and promote racial equity and justice. They plan to achieve this through various actions, such as hiring people of color and financing Black entrepreneurs.

Europe makes up over a third of all sustainable investing assets. The region has seen important regulatory developments, such as:

  • Institutional investors, asset managers, and advisors must report on how they integrate sustainability risks and adverse impacts at the entity level
  • Advisors are required to ask about their clients’ ESG preferences and advise appropriate products

While Europe saw a decline in growth from 2018-2020, this is because the region has changed how they define sustainable investing. Tighter legislation means that some products that previously qualified as sustainable may not meet the new requirements. The goal of the legislation is to create clear standards for sustainable products, promoting trust and easier access for investors.

The Mounting Pressure

Globally, the proportion of sustainable investing assets is growing. In fact, sustainable investments make up 36% of global assets under management, up from 28% in 2016.

Investment professionals say the top drivers of sustainable investing are to help manage investment risks, and because clients demand it. Not only that, the recent Intergovernmental Panel on Climate Change (IPCC) report has reinforced the importance of sustainable investments.

“The climate crisis poses enormous financial risk to investment managers, asset owners and businesses….. The public and private sector must work together to ensure a just and rapid transformation to a net-zero global economy.”
António Guterres, UN Secretary-General

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