Recent Events That Have Shifted the World’s View of the Dollar

The dollar has been at the center of global financial markets and international transactions for over 75 years—the status quo for global finance. However, significant changes in the world’s economy and political structure may lead to a system that is less reliant on the greenback.

Meaning of Reserve Currency Status

Since the end of World War II, the dollar has been the global reserve currency, the principal means of pricing and exchanging goods (like oil and food) and services between countries. Because of this status, central banks and major financial institutions hold vast dollar reserves for international transactions. If there is a question of which currency to hold or trade, it makes sense to use the dollar.  

Recent Events That Could Change the Role of the Dollar

U.S. policy, like federal stimulus and greater government spending, has increased the number of dollars in circulation and, by extension, the U.S. national debt. The dollar’s value against other currencies has not yet dropped, but that could easily change over time or all at once.  

There has also been an increasing acceptance of payment for commodities in non-dollar currencies. In March 2022, Saudi Arabia announced that it was in talks with China to start allowing payment for oil in yuan. Russia is also considering accepting yuan (and possibly Indian rupees) as payment for oil and coal.  

Recent sanctions have led to the weaponization of the dollar. The U.S. response to Russia’s invasion of Ukraine led to unprecedented sanctions, including freezing Russian central bank assets and assets owned by individual Russians. These actions may cause countries to diversify as a means of hedging against U.S. intervention, leading to the end of the dollar’s “safe haven” status.  

It’s also possible that several countries may create their own Central Bank Digital Currencies (CBDCs). This could lead to less reliance on the dollar as a global medium of exchange. We may also see central banks tying the value of their currencies to a basket of physical commodities, resulting in a “commodity standard,” a modern-day version of the former gold standard.  

Takeaways

• None of the above-listed changes have resulted in the immediate demise of the dollar’s rule. In fact, the dollar is currently at 20-year highs against a basket of major currencies.
• Economists are not predicting a sudden end to the dollar’s reserve currency status. The end of dollar dominance is more likely to be a gradual process that plays out over years or decades.
• This is not a “sky is falling” moment, but change is inevitable. Businesses would be wise to have plans to weather the storms that are still at the edge of the horizon. Companies should assess their exposure to FX risk and consider hedging strategies if appropriate.