The dollar has been the global reserve currency for decades, backed by US Treasury markets, economic stability, and international faith in American institutions.
But recent shocks—ranging from weaponised sanctions to domestic political polarisation—have shaken global confidence.
https://www.atlanticcouncil.org/programs/geoeconomics-center/dollar-dominance-monitor/
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The proportion of the dollar in world reserves, using the IMF measure, has declined from over 70% in 2000 to roughly 58% in 2023. Central banks, especially those in emerging markets, are diversifying out of the dollar into gold, euros, yuan, and other currencies.
I mean hell, even the US is diversifying out of the dollar by setting up a crypto-reserve!
This presents a vital opportunity to Europe. The EU's pandemic bonds proved surprisingly popular, showing investor demand is there. If defence spending powers more collective borrowing, Europe could create a more integrated, deeper bond market—vital to challenging the US in attracting reserve investors.
However Europe's lack of a unified fiscal policy may prove a limitation on them becoming a full reserve currency.
Concurrently, China is internationalising the yuan with initiatives like the Belt and Road and yuan-denominated crude oil trades. Capital controls and political openness however put limits on its global appeal.
A mulit-reserve-currency future?
Possibly a "post-dollar" world will not witness a single omnipotent substitute, but a decentralised system. As with the displacement of sterling in the early 20th century, transformation occurs incrementally but it is possible.
The dollar's dominance is no longer a given. Both policymakers and investors are preparing—nervously—for a world in which substitutes matter more than ever before.
At the end of the day I guess it's a matter of...