Is the Dollar Going Away?

by Rob Stoll, CFP®, CFA Financial Advisor & Chief Financial Officer / April 12, 2023
Robert Stoll, CFP, Financial Advisor

There’s been a lot of talk in the media about the demise of the U.S. Dollar. Countries are banding together to create an alternative to the dollar when it comes to international trade. The dollar’s status on the international stage is a huge issue for all Americans. We’ll see just how dominant the dollar is today, and answer the question, “Is the dollar going away, as we know it?” 

How is the U.S. Dollar Regarded Globally?

We first have to recognize a truth about the international financial system that has ruled since the end of the Second World War. While different international exchange regimens have come and gone, there’s been one dominant feature: that the U.S. Dollar is the reserve currency of the world. 

“Reserve currency” refers to the one currency used on Earth that is widely accepted by people across the globe as the most trustworthy medium of exchange. Throughout the last 500 years, there has been one dominant reserve currency at a time. Not coincidentally, a nation’s reserve currency status correlated with its military strength. Spain, Portugal, France, and British currencies have enjoyed reserve currency status at one point or other during the last five centuries.

Given the U.S.’s surge on the global stage during the first two world wars in the early 1900s, the Dollar has taken its place as the globe’s reserve currency. We can see this two ways. First is the share of international transactions that settle in the U.S. Dollar versus other currencies. As you can see, it’s not even close, the Dollar dominates.

Second, non-U.S. countries that run a surplus with the U.S. obviously get Dollars in return. When U.S. consumers buy TVs, they’re buying them from Asia using U.S. Dollars. The country receiving those dollars has to do something with them, and often they hold on to those dollars. The piles of money accumulated by exporting countries are called “foreign exchange reserves.” And this handy chart from Wikipedia shows the Dollar dominates global foreign exchange holdings.

The conclusion from these two charts is that, A) The U.S. Dollar dominates global transactions and reserves, and B) that dominant position has changed little over the last few decades.

Why Are People Saying the Dollar is Losing Status?

With these facts in mind, it’s curious that we’re flooded with financial media and cable TV news stories of ‘de-dollarization.’ What’s up with that? Realize that these “dollar is dead” stories aren’t new. Every few years – for whatever reason – investors latch on to the idea that the dollar is dying, as these articles from 1975 and 2004 demonstrate.

We can trace the cause of the current anti-dollar movement back to Russia’s invasion of Ukraine last year. In response, the U.S. and Europe froze Russian assets in dollars and made it much harder for Russia to engage in trade in dollars. Imagine having your bank account frozen for committing a wrong (we’ll get to that in the next article!) and not being able to access your savings.

Freezing Russian dollar assets was a huge wake-up call to many adversaries that have U.S. Dollar assets. China has over $3 trillion of foreign exchange reserves, a good portion of that in dollars. The last thing they want is to lose their assets denominated in dollars. Saudi Arabia, Brazil, India, and Russia are some of the biggest holders of U.S. Dollars. 

If these countries want to reduce their dollar exposure, they have to settle their trade in something other than dollars. News stories have emerged in recent weeks of deals between China and other countries to settle oil imports in China’s currency, the Yuan. Other countries are reportedly trying to form trade blocs to do the same – settle trade in something other than the dollar.

Pile these stories together and suddenly it feels like the dollar is indeed losing status. But look again at those headlines above. This kind of talk has been going on for decades.

Why Does the Dollar Status Matter?

A good question at this point is, “Why does the status of the dollar matter to us?” I’m glad you asked! It is the one issue that informs every single international relations issue: power. 

When a country enjoys reserve currency status, they are in the best position to determine the terms of trade with other countries. Think about it. If you’re buying important foreign goods such as food and oil, and you settle those trades in a currency that you can print, you’re in a pretty nice bargaining position. Since so much of the world’s trade in life-giving goods is in dollars, the U.S. enjoys a powerful position as the only country that can print dollars, as needed.

In 2022, non-U.S. countries got a taste of what it means when you DON’T have reserve currency status. After the invasion of Ukraine, the price of oil, soybeans, wheat, and other commodities rose sharply. U.S. consumers of course felt those price increases at the pump and at the grocery store. 

But imagine if you were living in Japan. Not only did the price of oil rise upwards of 50% in the first half of 2022, but the value of the Japanese Yen lost 20% of its value versus the Dollar. That means the price of oil for Japanese consumers rose almost 70%. Talk about pain at the pump!

So when you’re hearing stories today with everyone dumping on the dollar’s status, understand that these stories are in reaction to many country’s experiences since the Ukraine invasion. Seeing the price of commodities surge in local currency terms was bad enough. But watching the U.S. unilaterally freeze (i.e. confiscate) Russia’s dollar assets was another. Suddenly, the dollar’s reserve status became a big problem.

And that’s the point: living in a country that doesn’t have global reserve currency status makes that country more vulnerable to external shocks. Thankfully, we don’t have to worry about that as U.S. citizens.

Will the Dollar Lose Reserve Status?

If all these countries are trying to replace the dollar, it makes sense to worry about the dollar’s reserve status. The question is, what replaces the dollar.

The answer to that question is the precise reason we shouldn’t worry about the dollar’s reserve status. What is everyone going to replace the dollar with?

China is trying hard to make its currency an acceptable currency of trade. But if you’re worried about the U.S. confiscating your dollar assets, do you really feel better about China NOT pulling that trick against their adversaries one day? 

Europe is constantly making noise about wanting its Euro to replace the dollar because they understand the benefits they’d have if they did global trade in Euros. But the Euro is only 24 years old, and they depend on the U.S. for military security. Not only that, there are legitimate questions whether the Euro monetary experiment will even work over the long-term.

The closest thing to a “dollar killer” that isn’t dependent on a single country would be the International Monetary Fund’s Special Drawing Rights, or SDRs for short. SDRs work similar to how the Euro was put together: a negotiated exchange rate between several countries cobbled together to form a single unit. But the prospects of SDRs replacing the dollar are slim if the U.S. is unwilling to take part.

Is the Dollar Going Away?

The takeaway from this article about the dollar is that it’s not going away. Nothing exists that can logically replace it at this point in history. And despite the best efforts of countries to come up with a dollar alternative for the last 50 years, nothing has emerged. I see no reason that would change now. 

This is a big question, but these are the kinds of things we as financial advisors are paying attention to. If you want to stay up to date with what we are talking about, subscribe to our bi-weekly email. But, if you are looking for confidence in your finances in the midst of uncertainty, reach out! We’d love to show you how we can partner with you.

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Rob Stoll, CFP®, CFA Financial Advisor & Chief Financial Officer

Rob has over 20 years of experience in the financial services industry. Prior to joining Financial Design Studio in Deer Park, he spent nearly 20 years as an investment analyst serving large institutional clients, such as pension funds and endowments. He had also started his own financial planning firm in Barrington which was eventually merged into FDS.