The US dollar accounts for over 50% of reserves held and has unwaveringly remained the primary reserve currency since 1945, especially after it replaced gold as the most-held reserve asset after there was a move to a fiat monetary system.  European currencies have remained steady at 20-25% since the late 1970s, the yen and sterling are around 5%, and the Chinese RMB is only 2%, which is far below its share of world trade and world economic size, for reasons we will delve into in the Chinese section of this book.  As has been the case with the Dutch guilder and the British pound, the status of the US dollar has significantly lagged and is significantly greater than other measures of its power.

That means that if the US dollar were to lose its reserve status and significantly depreciate in value it would have a devastating effect on the finances of those countries holding those reserves as well as private-sector holders of dollar-debt assets.  Who would be the winners?  Those with dollar-debt liabilities and those with non-dollar assets would be the big winners.  In the concluding chapter, “The Future,” we will explore what such a shift might look like. 

Eoin Treacy's view

The massive increase in the supply of currency since the end of the quantitative tightening regime last year is a headwind for the US Dollar. The fact the monetary and fiscal assistance programs deployed by the USA are much larger than in other countries is certainly a near-term headwind for the Dollar but the big question is whether this is a secular change?

One of David’s favourite adages was “no country wants a strong currency but some need a weaker one more than others”. Today, the USA needs a weak currency to stoke demand for exports and to foment inflationary pressures to put a dent in the massive quantity of debt accrued. The challenge is many other countries are in the same situation. That is the primary reason gold is appreciating in just about every currency.

What would have to happen for the US Dollar to lose its reserve currency status? The easy answer would be to lose a world war against China. That would certainly do it. However, it may not require such a massive leap.

Gold was historically the basis for money so redemptions of gold caused the end of convertibility in the 1930s and 1970s. The evolution of the petrodollar system supplanted the gold basis for economic activity.

Oil is still by far the world’s most significant commodity and the USA is now a major exporter instead of being the world’s largest importer. That is a massive secular change which bolsters the reserve status of the Dollar.

The evolution of technology as the basis for economic activity is a new phenomenon which puts greater focus on collection and interpretation of data rather than physical resources. The multiple of population, collection, analysis and synthesis of data support economic value in the digital economy.

The USA benefits because its data companies appeal to most of the global economy, but China is a significant competitor because it has full control of the world’s largest most digitally connected population. The development of quantum computing, autonomous vehicles and low latency 5G connectivity will greatly enhance the value of the digital economy. Therefore, in order to supplant the US Dollar as the global reserve currency China would need to be clearly dominant in the digital economy. It’s well on the way to be the main supplier of batteries as part of its drive towards less reliance on importer energy but is a very long way from independence.