‘King Dollar’ Battered as Nations Seek to Dethrone it as World’s Reserve Currency

The U.S. dollar has been the world’s reserve currency since the Bretton Woods agreement in 1944, yet some economists believe the dollar’s reign could be in jeopardy.

If the dollar falls from its “throne,” you will feel it in your pocketbook.

There’s been plenty of talk lately that the U.S. dollar could lose its reserve currency status.

A growing number of nations are turning away from the greenback as a payment currency. But that is a separate issue from whether the dollar will lose its reserve currency status.

If the dollar were de-throned as the world’s reserve currency, some have warned that we would see “soaring inflation” and a catastrophic drop in the American standard of living. Other economists, however, believe the effect would not be nearly that dramatic.

Experts not only fail to agree on whether the dollar is doomed to lose its reserve currency status, they also differ on what the economic fallout would be.

Pete Earle at the American Institute of Economic Research is one of many economists who say there is no short-term threat to the dollar’s reserve currency status because there just aren’t better options.

“The Federal Reserve has made a lot of mistakes and certainly they’ve debauched the value of the dollar. But in the land of the blind, the one-eyed man is king. The Fed is still very much the gold standard in monetary policy,” Earle said.

He also believes there is no reason to be worried that the dollar will be replaced by the Chinese Yuan.

“The odds that the Chinese renminbi or yuan will, well – take the dollar’s place – are at present slim to none.”

The reason? China won’t do what it takes to become a reserve currency.  It won’t allow the yuan’s value to float. It pegs the yuan to the dollar. And its capital markets are largely closed to investors. The US has the deepest capital markets in the world.

James Rickards, the editor at Strategic Investment, explained, “If you want to be a reserve currency, so-called, you need a bond market, you need a securities market – a big one – and you need a lot of other features. A network of dealers, underwriters, settlement clearance, custodians, depositories, hedging options, repo futures options, you know, etcetera,” he explained. “And above all, you need the rule of law. Who trusts the Chinese? Nobody. Who trusts the Russians really? Nobody.”

Talk of a “Brics currency, bringing together Brazil, Russia, India, China, and South Africa, is still just talk. America’s share of the reserve currency market has fallen mostly because of the creation of the Euro.

If the Dollar were replaced as the world’s reserve currency, your money would be worth less, foreign goods would cost more, inflation would increase and the US government would have to rein in its runaway spending because fewer nations would be buying US treasuries and financing our huge federal debt.

Nations currently ditching the dollar as a payment currency is a more pressing issue.  Some nations are dropping the dollar to simply “cut out the middleman.” They want to use their own currency when trading.

Others are afraid of a “weaponized” dollar after the US froze hundreds of billions of dollars in Russian reserves because of its invasion of Ukraine. Others have a political objective: they want to see America’s economic dominance weakened. 

This is a potential near-term threat to the dollar’s value. But economists say any threat to the dollar’s reserve currency status is many years, if not decades, away.

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