Market Insights, The US Dollar

Future of the World Reserve Currency – What happens if the US dollar loses its status?

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Image showing if the dollar loses its status as the world's reserve currency, how will it impact you and your standard of living and the world reserve currency

Last updated: 5/10/2022

The US dollar has been the world reserve currency for nearly 80 years. However, the purchasing power of the dollar has been falling steadily since we left the gold standard in the 1970s. In the last two decades, with the Fed’s massive money printing and the government’s debt and deficits, it’s no wonder that countries around the world are losing faith in the strength of the dollar.

So, what would happen if the dollar would lose its status as the world reserve currency? What are the actual benefits you and I get by our currency being the reserve currency of choice across the globe?

How does the world’s reserve currency work?

The world’s reserve currency is a national currency that is widely held globally because it’s expected to hold its value, and the market for every item or service denominated in that currency is extremely large and liquid.

Before the US dollar, other currencies have been the preferred reserve currency of the world, but they were eventually replaced by another currency. History clearly shows us that no currency can keep their world reserve status forever.

A chart showing the lifecycle of of the world reserve currency and visualizing what would happen if the us dollar loses it's status as the world reserve currency
A chart showing the lifecycle of world reserve currencies

So, the question is not whether or not the US dollar will lose its world’s reserve currency status but instead – how close are we to that moment and how will affect the US dollar and US citizens? What can history teach us to help us understand?

World reserve currencies never last forever, and it looks like the US dollar is about to lose its status as the world's reserve currency as well.
Chart showing the global reserve currencies since 1450

What are the benefits of being the world’s reserve currency?

1) Keep international transactions running smoothly

To the world of commerce, the main benefit  of having a world reserve currency is to keep international transactions running smoothly. When everyone works with the same currency, trade becomes easier.

This is especially important for trading with countries whose currency isn’t used outside of their borders or whose currencies are volatile and fluctuate significantly — these countries rely on the dollar to trade since their trade partners are unlikely to accept their risky currency as payment.

2) Keep transactions costs low

Since the US is issuing the currently used reserve currency, our transaction costs are reduced. We don’t have to exchange our dollar for another currency to trade — that burden, and the exchange cost, lies on our trading partners.

We are also not exposed to the same level of exchange rate risk, especially when it comes to commodities, which are often quoted and settled in dollars.

3) Boosted liquidity

When more companies and individuals are using the dollar, it means more transactions are denominated in dollars. This boosts the dollar’s liquidity: financial assets can be priced more easily, and loans are more easily provided.

In short, US companies get easier access to capital because of the dollar’s reserve status. Those companies can employ you or a family member, for example, so the dollar’s status is a benefit to you as well.

4) Easily exported debt

Another privilege of the dollar being the world reserve currency is the fact that it becomes easier for the United States to export its debt. Being a world reserve currency puts the dollar in higher demand because of the trust in the dollar.

This makes dollar-backed securities (e.g., US Treasury bonds) more attractive. Countries tend to buy these dollar-backed bonds to increase the credibility of their own money supplies. The sales of these bonds fund our needs and lifestyle. 

How likely is it that the US dollar will lose its status as the world reserve currency?

Experts are torn on this issue. While some believe that the dollar is strong, others have watched the fall of the purchasing power of the dollar and are skeptical towards our greenback. 

According to the Federal Reserve, the dollar is used in 40% of global trade transactions. When it comes to global cross-border transactions, the dollar dominates, being used around 80% of the time.

A graph of the world showing with countries and international groups that have switched from the US dollar to national currencies in trade and why the US may lose its status as the world reserve currency

But this may soon be changing as the confidence in the dollar globally is starting to fade. The purchasing power of the dollar has been falling at an alarming rate. Take a look at this chart, which shows what happened to the US dollar over the last 100+ years.

The purchasing power of the dollar has been on a steady decline since World War II, and the loss of purchasing power is part of the reason countries are losing faith in the dollar as the world reserve currency.
Chart showing the purchasing power of the us dollar since 1913

As the purchasing power of the dollar falls, more and more countries may find it’s in their best interest to use more stable currencies for their transactions, dethroning the dollar as the world reserve currency.

And we’re already seeing this — the dollar’s share of global official reserves is the lowest in over 25 years.

The US dollar's share of global exchange reserves is at its lowest point since 1995.
Chart showing US dollar’s share of global official reserves

The major problem with the dollar being the preferred reserve currency in the world is that we have been spending beyond our means. We’ve taken to bailing out banks and big businesses when crises hit them.

We also sent billions in support to our citizens during the COVID pandemic and roughly $800 million to support Ukraine against Russian invasion. Although these are undoubtedly noble causes, to do all this, we’re increasing our money supply and along with it comes inflation. We believe in the strength of the dollar and take it for granted that other countries will keep believing in the dollar as well. Thus, we’re not worried about debasing the dollar through money printing.

A pie chart showing how the world reserve currencies have changed over 120 years and explaining how to understand if the dollar will lose its status as the world reserve currency
How reserve currencies have changed over 120 years

How could your standard of living change if the dollar gets replaced as the world reserve currency?

Through the reserve currency privilege, we in effect let the world share our debt and finance our needs. This cannot last forever. The continuous weakening of the dollar could lead to a significant decrease in demand for the dollar and dollar-backed securities.

That means that the United States won’t be able to sell off its debts to foreign countries. 

A weakening dollar in itself makes foreign goods and services more expensive for American consumers and businesses, and should the dollar lose the reserve currency status, it would make our transactions more expensive as well — costs that businesses would pass on to US consumers. 

Here is a situation where our current rising inflation could explode higher just because we will be forced to trade with other currencies to get the goods we want and need. Interest rates for American consumers and businesses would likely also increase, making everything from buying a house to building a factory more expensive, which equals more inflation.

Let’s not forget our corporations’ easy access to debt, which will be more difficult and more expensive if the dollar is not Number One.

How would inflation be impacted if the US dollar loses its status?

In recent months, inflation has become an increasing concern. Without the global demand for the dollar and with countries offloading dollars, inflation is likely to rise even further. This should concern everyone, especially those of us who have retirement savings.

Your hard-earned money could lose a significant portion of its value if the yUS dollar loses its spot as the world reserve currency. 

In short, for us Americans, our standard of living could decrease dramatically. It’s time to protect your wealth.

How can you protect your financial future and hedge it from the dollar?

We all live, buy, sell, manufacture, and consume in dollars. Hedging against the dollar, especially with its downward trajectory, is important, so you need to act now.

A small portion of your portfolio in gold and silver gives you peace of mind that, no matter what happens to the dollar, your financial future is protected. 

The chart below compares the purchasing power of gold to the purchasing power of the US dollar since 1970.

Since America dropped the gold standard in the 1970s, the purchasing power of the US dollar has fallen while the value of gold has been on the rise.
Chart showing purchasing power of the US dollar vs gold since 1970

As you can see, while the dollar is the world reserve currency, gold’s upward trajectory over the last 50 years is the exact mirror image of the dollar’s, proving gold’s ultimate purpose as a store of wealth that preserves and grows your wealth through the decades.

The lower the dollar goes, the more dollars are required to buy the same amount of gold, and the higher gold goes, offsetting the dollar’s demise. 

If you haven’t already rolled a portion of your IRA or 401k into physical gold, are you going to wait until the dollar and the value of your savings decline even further?

About Darwin Hostelley

Darwin has over 30 years of experience in the investment and risk financing sectors, focused on precious metals as investment assets. As an avid writer, Darwin has published multiple articles about investing in gold and silver, with a focus on their ability to protect and grow his clients’ investment portfolios. As a leading Sr. Portfolio Manager with Gold Alliance, Darwin oversees many of our clients’ portfolios.
 

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