The Dollar Reigned Supreme
The end of World War 2 ushered in a new financial world order. The Bretton Woods Agreement pegged other currencies to the U.S. Dollar. The greenback has reigned supreme ever since. But the day of the dollar may be coming to a close.1
For now, the U.S. dollar remains the king of global finance. The dollar is the global reserve currency. It represents 60% of global reserves, 88% of global currency trades, 60% of international banking liabilities, and is listed on 79% of international trade invoices. The SWIFT payments system is used for more than 50% of global cross-border transactions. It is controlled by the central banks of ten U.S. allies. 2
Challenges to the Dollar
The dollar is facing several new and powerful challenges to its supremacy.
U.S. currency was once on the gold standard. Now the dollar is backed only by the “full faith and credit” of the U.S. government. The actions of the Federal Reserve are causing a loss of that faith. Their policies are resulting in runaway inflation. The dollar is losing its value. A dollar in 1971 is worth less than 19 cents today.3 Experts fear that there is no limit to how far the dollar can drop. Citizens could be stuck with stacks of worthless green paper.
The Russian invasion of Ukraine shows another threat to the dollar. Russia’s $630 billion in foreign reserves were sanctioned. Essentially, making them worthless. They were also cut off from the SWIFT system. The Russian economy quickly began to collapse. Countries clearly saw how holding dollars threatened their economic security. Non-U.S. allies are now looking to divest from dollars.
Countries such as China realize the danger of the dollar. They are breaking away from the global financial system. China is using its size to make other countries trade in its own currency, the yuan. The impact of China’s move was recently seen in the oil market. Up until now, oil has been exclusively traded in dollars. But economists were rattled when Saudi Arabia announced that they are considering the use of the yuan as well.4
A third threat to the U.S. dollar comes from digital currency. Over 100 countries are exploring Central Bank Digital Currencies. CBDCs are a digital form of a country’s sovereign currency. Digital currency promises to be a more cost-efficient way to handle trade. China already has a digital yuan in use by over 250 million people. Experts predict the digital yuan could become the currency of choice for international trade within a decade.5 According to CNN Business, “the rise of central bank digital currencies could… potentially threaten the status of the US dollar as the global reserve currency.” This has major implications for every retirement investor. A selloff in the dollar, even gradually over time, could be disastrous for dollar-valued assets.
The Biden administration fears the US being left behind. They just said that they want to explore a digital version of the dollar.
Digital currency holds some darker implications. A digital currency can track everything you buy. The government could limit what you are allowed to purchase. They could also decide who has access to money. Or they could turn it off all together.
Bretton Woods laid the path for an orderly global currency system after World War 2. Now, that order is starting to unwind. There is no plan. There are only competing interests of rival countries. The dollar’s domination is far from guaranteed. History shows that one thing is certain. Whatever fiat currency, physical or virtual, reigns supreme, gold will always be in demand. If you want stability in a sea of chaos, you should contact AHG about a Gold IRA.