Will War in the Ukraine Undo the Dollar as the Reserve Currency?
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Financial sanctions weighing on Russia are sending up red flags around the globe. The seizing of its foreign reserves and eliminating access to SWIFT is leading Russia and other countries to reassess the role of dollars in global trade. Today, there are central bankers and heads of Treasury asking themselves: Dollars, gold, or rubles?
This article explores the problem vexing Russia and its trade partners. I explore how the threat and use of sanctions may force some countries to contemplate weaning off the world's reserve currency.
Reserve currency status
The rule of law, economic and military might, and the most liquid capital markets are the principal reasons the dollar is the preferred currency for most global trade, as shown below. Because of its status and global acceptance, the U.S. dollar is considered the world's reserve currency. For more on the dollar's status, please read my article, Triffin Warned Us.
Despite Washington's reckless monetary policy and burgeoning trade and fiscal deficits, the dollar remains the world's reserve currency. The benefit to the U.S. is that countries with dollar reserves are essentially forced to invest in U.S. Treasury securities regardless of yields. As a result, about a third of U.S. Treasury bonds are held by foreign entities. Given the ability to run massive deficits and fund them easily, it should not be surprising that American politicians want to keep the dollar as the world's reserve currency.