Lifespan of a Reserve Currency

There is a growing discussion building as to the ability of the United States of America to continue its domination of world trade and to maintain the U.S. Dollar as the world’s reserve currency. This is important because the country that provides the reserve currency benefits from stronger demand for its currency by central banks and other investors, allowing it to maintain lower interest rates and thus a stronger economy. It also adds to its global political power and attracts more trade.

Over the past six hundred years, there have been six dominant currencies in the world. These currencies dominated world trade during their respective tenures. There are certain commonalities that define each of these currencies:

    • The currency was issued by a dominant trading power
    • The currency was freely convertible into other currencies
    • The economy it was based on was stable
    • It was frequently associated with a powerful or dominant military

It is interesting to note that since the mid-fifteenth century, no country has maintained its grip as the reserve currency for much longer than 100 years. The U.S. has exceeded that benchmark, having dominated world trade since 1920 when it took over the role from the United Kingdom. In each case, it appears that there was a major war or civil insurrection that triggered the loss of the country’s dominant currency position:

    • Portugal (1530) – The Portuguese Succession Crisis and the Iberian Union
    • Spain (1640) – The Dutch Occupation of Spain; and The Collapse of the Iberian Union
    • Holland (1720) – Anglo Dutch Wars
    • France (1815) – The French Revolution and the Defeat of Napoleon
    • Britain (1920) – The Boer War and World Wars I & II

There have been several tentative attempts to replace the U.S. dollar’s dominant status and related role in the global financial system.  The most valid competitor so far is the launch of the Euro in December 1998.  In 2014 Brazil, Russia, China, India, and South Africa formed the “New Development Bank”, creating a competitor to the U.S.-dominated World Bank. In 2023, we have seen multiple agreements between developing countries to begin trading in their own currencies, rather than U.S. dollars.  Saudi Arabia will now sell oil to China, accepting Yuan as payment. China and Brazil will no longer use the U.S. dollar as a currency for trade, instead utilizing their own currency.

There are many reasons that developing countries are looking for a replacement for the U.S. Dollar as a sole reserve currency.  Notably, the notion that if a country falls afoul of U.S. Foreign Policy, the U.S. can and has frozen that country’s assets and blocked its access to SWIFT, effectively cutting the country off from the global trade payments mechanism. When this fate befell Russia in 2020, many countries took note and felt the need to diversify out of the U.S. Dollar. Secondly, these countries believe that the U.S. takes financial advantage of its position to the detriment of other countries.  Lastly, the BRICS economies are now as large as the G-7 and feel underrepresented in the global finance scene and are seeking alternatives not just to the dollar but to the Western-dominated institutions such as the IMF and World Bank.

From a Canadian investor’s viewpoint, these events are not yet meaningful, and it will take years before the dollar is replaced – if it is replaced – as the reserve currency. But as one looks out some ten or twenty years from now, it is possible that the dominant role of the dollar could weaken as trade diversifies across various currencies.

Disclaimer:  Please note that the publication is designed to provide general information only. It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as financial advice, nor should the information be considered a substitute for personal advice. Information used in this publication has been gathered from sources believed to be reliable. Logan Wealth Management is not responsible for and assumes no liabilities or responsibility for any loss or damages suffered as a result of the use or misuse of, or reliance on the information or content of this publication. Please consult your financial adviser to determine whether the information is applicable to your personal situation.