Is the dollar in danger?
You may hear that the dollar is nearing its end as the world reserve currency and that recent events (the threat in the divided US Congress not to raise the federal debt ceiling, the US seizing assets of Russian oligarchs without due process) contribute to that end. Other options have been proposed, such as bitcoin, the euro or the Chinese renminbi.
The truth is that it is highly unlikely that the dollar will be replaced in the foreseeable future.
The dollar currently represents more than half of the world's foreign exchange holdings (58% at the end of December 2022) and more than 90% of world trade is conducted in dollars. People prefer dollar transactions because the US economic system has a strong rule of law that protects property rights and enforces contracts – another way of saying this is that foreigners are protected when they transact in dollars, something they cannot be sure of say if they buy or sell in crypto or renminbi.
Another reason why the dollar dominates is because the US bond market, denominated in dollars, is by far the largest in the world, meaning international trade has tremendous liquidity.
But a currency's life as the world's favourite can be limited, as you can see from the chart below.
We no longer trade in the Florin and have done so since the 14th century. The Dutch guilder has not been the global standard since the late 17th century, and the British pound gave up the reserve mantle in the 1920s.
We don't think it will happen any time soon, but history suggests that eventually something will happen that will become the new world reserve currency and the country that then issues this world reserve currency will also eventually replace the US as the next economic superpower.
What does all this mean for you? If your investment portfolio is not well positioned, you may be at risk if or when the US dollar disappears as a world reserve currency.