It’s not a question of “if” but “when.” The dollar will not always be the world’s reserve currency. Eventually something else will replace it—perhaps another country’s currency or some other asset or commodity. But the dollar’s dominance is not ending anytime soon, despite the rise of China, crypto, or the prospect of another Cold War.
The global financial system still depends on the dollar. Many transactions are priced and carried out in dollars, even when done thousands of miles from American shores. Countries hold dollars and U.S. bonds to stabilize their currencies. The special status of the dollar keeps its value high and relatively stable, and it keeps our interest rates low and the bond market liquid, even—or rather, especially—in times of crisis. Dollar dominance also has costs: the demand for dollars makes them more expensive, which hurts the U.S. export sector. But on balance, holding the world’s reserve currency is an extremely valuable asset.
However, the dollar’s future now looks less secure than it did ten or even five years ago. Crippling sanctions imposed on the Russian economy remind countries just how vulnerable they are to U.S. government policies, so long as they hold so many dollars. Falling out of favor with the U.S. can result in economic devastation.
China, which is becoming an economic rival to the U.S., aspires to make the renminbi an alternative to the dollar. Its central bank is offering renminbi swap lines, which would provide liquidity to China-friendly central banks when they need it. China is also acting as an alternative to the IMF, offering bailouts to developing countries—and generating financial dependence on its economy. Beijing is also building infrastructure in such countries, filling a role more often performed by the World Bank.
The U.S., meantime, has abused its position, running up lots of debt and moving slowly to control inflation. Both of these actions make the value of the dollar much less appealing and much less certain.
But no viable alternatives yet exist to the dollar as a reserve currency. Very few currency and bond markets are as large and liquid as those of the U.S. Despite China’s efforts in the last decade to become a global contender, the share of global exchange reserves held in the renminbi is just 2 percent, compared with 60 percent in U.S. dollars. Odds are the renminbi will never take off, because the Chinese manipulate the value of their currency, which disqualifies it from reserve-currency status. Despite all the Fed’s bond-buying, the dollar’s value is set in the market, which makes it much more reliable and liquid. Currency manipulation tracks with Beijing’s political aims, which can be unpredictable, especially in uncertain times. Unless the Chinese government fully commits to being a market economy and floating its currency, the renminbi will never be a reliable store of value. And neither of those things are happening anytime soon. Cryptocurrencies and gold, meantime, aren’t viable candidates, either. They are more volatile than the dollar, and the dollar is ultimately less risky because it is backed by a large government and by U.S. goods and services.
Given its loose monetary policy, the United States doesn’t deserve its good fortune, but for now, dollar dominance is safe.