Is The Dollar Still The Gold Standard Of Currencies?

After trillions of dollars of U.S. government stimulus spending since the beginning of 2020 and with inflation running at its highest levels in more than 40 years, some investors are understandably growing concerned that "dollar debasement" is threatening the U.S. dollar's long-standing position as the world's preferred reserve currency.

Contrary to popular belief, Bank of America analyst Aditya Bhave said Thursday that the massive expansion of the Federal Reserve's balance sheet has not devalued the dollar.

The Numbers: In fact, the Invesco DB US Dollar Index Bullish Fund UUP is up 3.4% overall since the beginning of 2020.

Related Link: 'Probability Of Stagflation Is Increasing': Experts React To 8.5% CPI Inflation, Highest Since 1981

Bhave said the dollar has held up well first against inflation and then amid the U.S. sanctions against Russia. In fact, the UUP fund is up 9.4% in the past 12 months.

Some investors are concerned the dollar could lose its status as the world's reserve currency if other nations become concerned they could have their central bank reserves frozen in a manner similar to how Russia's dollar reserves are frozen. But Bhave said other countries understand they would have to do something egregious to have their dollar reserves frozen, and there's no guarantee any country controlling whatever currency theoretically replaced the dollar as the preferred reserve currency wouldn't do the same thing.

No Competition: At the same time, Bhave said no other country, including China, is currently positioned to challenge the U.S. combination of economic strength and depth of financial markets.

"While China’s major trading partners might shift some of their reserves into renminbi, the dollar should remain the dominant reserve currency for the foreseeable future," Bhave said.

Benzinga's Take: It may seem counterintuitive, but the free market has decided that the trillions of dollars in quantitative easing and the highest levels of U.S. inflation since the early '80s haven't negatively impacted the value of the U.S. dollar up to this point.

The biggest risk for the dollar in the future may be that there's a certain tipping point at which global attitudes toward the dollar would start to shift irreversibly, but it's seemingly impossible to know how close the U.S. is to that tipping point and what it would take to get there.