Google Plus Facebook LinkedIn Twitter Vimeo RSS

U.S. dollar as world reserve currency future looks bright

By ,

There has been a lot of talk in the press and on the news about the future of the U.S. dollar as the world's reserve currency. I personally see no reason for this to be a concern. Allow me to explain.

Just to catch up, since the 1940s, when the world let go of the British pound sterling and embraced the all-mighty dollar, the U.S. has held the position as the world's reserve currency.

As Wikipedia puts it, "A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves, and that is commonly used in international transactions."

Having the status of reserve currency gives us many economic benefits; however, there has been much talk recently about ending our reign.

I don't see how this could be possible when looking at the state of global economic affairs.

I agree that by issuing so many U.S. dollars we have devalued our currency. According to experts, the dollar is down around 39 percent since 1993. However, all currencies globally have seen dramatic reductions in their values. We are not alone in this.

I also agree that world reserve currencies do change. We started thousands of years ago in Greece, moved to Rome, Persia, Italy, Spanish pieces of eight were popular for a while, the British pound and now greenbacks.

I also can see the concern with the widespread flurry of printing of dollars for the past five years. Investors are worried we are reducing the value of the dollar down to nothing.

I hear all of these fears and valid points, but no one can answer one simple question: Who will replace us?

The most talked-about successor is China's renminbi, the official Chinese currency. I have no idea why China would want that.

Remember, China's economy relies heavily on exports. If the renminbi became the reserve currency, that could drive the value skyward. This is something the Chinese government has avoided for many years in order to keep its exports attractively priced.

China would also be forced to issue bonds, something the recent regimes have not wanted to do.

China enjoys having a low-priced currency; it prospers from large amounts of trade. A reserve currency could put an end to both.

Some suggest that gold could replace the dollar. Currently, no countries use gold to back their currencies.

Gold is a metal, not a currency. You cannot walk into a bank, lay down gold and walk out with cash. Nor could this transaction take place in a store. Gold is not what people think it is.

There are no emerging markets that could replace us, either. Currently, no emerging markets' currencies are being used internationally.

Central banks are actually stockpiling the U.S. dollar. Reserves have grown from $500 billion in 1994 to close to $4 trillion this year.

Beyond having no other currency currently in place to compete, we have other bright spots of hope.

Our bond yields are some of the highest of first-world countries, outpacing both Germany and Japan.

Don't forget that oil is still traded in U.S. dollars, and Chinese central banks choose to receive U.S. dollars from us when they trade.

If all of this information is not enough, let's not forget the 2,150 United States' nuclear-tipped warheads deployed in the world. Military might has always been a major reason for reserve currency status.

There is just no reason for a wholesale move from our currency to any other. There are no other attractive options out there currently.

Will it change one day? I have no doubt. However, I don't see it happening any time soon.

More from the Wealth Blog

Joe Wirbick

Joe Wirbick

Joe Wirbick is the president of Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. Tax information is provided for informational purposes only.

Leave a Comment


Please note: All comments will be reviewed and may take up to 24 hours to appear on the site.

Post Comment
View Comment Policy