It has been nearly 80 years since western countries got together in Bretton Woods, New Hampshire, and declared the U.S. dollar the world’s reserve currency. During that interval, growth in the U.S. economy and in U.S. markets has validated that status.
But readers of recent headlines could be forgiven for getting the impression that the dollar’s reign is at risk. Virtual currencies have generated a significant amount of enthusiasm over the past several years; high inflation and rising U.S. Federal debt risk debasing the dollar; and the recent use of sanctions that prohibit dollar-based transactions could certainly lead countries to limit its use for reserves and payments.
Saudi Arabia expressed its displeasure at renewed negotiations between the U.S. and Iran by suggesting that they would begin accepting Chinese renminbi in exchange for oil, breaking the dollar’s stranglehold as the sole denominator for petroleum.
Despite recent speculation, however, the U.S. dollar has gained against the currencies of other countries over the past six months. By some measures, it stands near a twenty-year high. On the digital front, bitcoin is worth 40% less against the U.S. dollar than it was in November of last year.
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The U.S. dollar isn’t perfect, but other currencies are less so. |
There are certainly good questions about how the dollar’s role in the world may evolve in the years ahead. But one of them is: what might rise to take its place? What other currency could be more widely used for transactions? Which would be seen as a more reliable store of value? The dollar is not as dominant as it was twenty years ago, but it is still the best of the bunch. The next most popular currency in reserve management, the euro, accounts for only 21% of the world’s total. The Chinese renminbi comprises less than 3%.
