There’s a lot of dollar doomism in the air lately…
You may have come across it…
The story goes that the U.S. dollar is about to lose its status as the world’s reserve currency.
Pundits like Glenn Beck and Tucker Carlson are saying this will spell doom for the U.S. economy.
Even the big guy himself, Donald J. Trump, is worried. Earlier this month, he posted on his Truth Social platform that the “dollar is collapsing.”
Look far enough out, and they’re not wrong. The dollar will almost certainly lose its status as top dog… one day.
But lot of big changes have to happen before that day arrives.
So, today, I’ll unpack what a reserve currency is. And we’ll look at how the dollar could lose its reserve status.
Then I’ll show you why it’s unlikely to happen anytime soon.
Let’s begin with what a reserve currency is…
It’s any currency central banks hold as part of their foreign exchange – or FX – reserves.
Think of FX reserves as “shock absorbers”…
They allow governments to adjust the value of the currencies they issue versus currencies of countries they’re trading with.
China and Japan, for instance, rely on exports. So, they want to keep their currencies weak. This makes it cheaper for foreigners to buy their goods.
But if a country relies heavily on imports – especially food and energy imports – it can’t let its currency get too weak. Or those imports will get too expensive in local currency terms.
The U.S. dollar became the de facto world currency in 1944…
That’s when 730 delegates from 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire.
They were there for the United Nations Monetary and Financial Conference – aka the Bretton Woods Conference.
They decided that the world currency system would center on the U.S. dollar, which had about two-thirds of the world’s gold supply at the time.
And that the U.S. dollar would be tied to gold at a fixed rate.
Gold backing fell away from the dollar in 1971, when President Nixon defaulted on the U.S. government’s promise to swap dollars for gold.
But because of the size of the U.S. economy… and its central role in world trade… the dollar stayed top dog.
But here’s the thing that a lot of folks miss….
There isn’t one reserve currency. There are several.
The euro, the Japanese yen, the Chinese renminbi, the British pound, the Swiss franc, as well as the Australian and Canadian dollars.
As you can see, the U.S. dollar accounts for only 58% of global FX reserves.
It’s still the primary reserve currency. But it’s not a dominant as some folks believe.
And the dollar will become less dominant over time…
In 1999, when the euro launched, the dollar’s share of global FX reserves was 71%. At 58% today, it’s already in decline.
And Russia, China, Iran, Saudi Arabia, and other countries that don’t trust America, don’t like having to use its currency one bit.
They know the U.S. will weaponize the dollar’s central role in world trade to punish them if they step out of line.
Just take what happened last year after Russia invaded Ukraine.
Washington locked Russia out of the global dollar payments system. It also froze about $630 billion worth of Russian FX reserves.
That’s why the Chinese renminbi has become the de facto reserve currency in Russia. It’s no longer part of the U.S. dollar trade. So, it no longer needs U.S. dollar reserves.
And we can expect to see a lot more of that kind of thing as tensions between the U.S. and these countries heat up in the coming years.
But that’s not enough to dethrone the dollar…
If you don’t use the dollar, you have to use another currency. And there isn’t a suitable replacement.
It’s not the Russian ruble. Russia was a big player in the global economy before it invaded Ukraine. Now, it’s a pariah state.
The Chinese economy is way bigger. But its currency, the renminbi, doesn’t float freely against other currencies like the dollar, euro, and yen do. Instead, its central bank closely manages its exchange rate.
And the Chinese financial system is still too murky to rely on. That’s why the renminbi makes up only about 3% of the world’s reserve currencies.
The closest contender for the throne is the euro. It’s the currency used by 27 European Union member states.
The problem with the euro is that no currency union has ever stood the test of time. And people are worried that this currency union will fall apart… as it seems to be doing every couple of years or so.
Then there’s the significant matter of America’s military might…
Many see U.S. military power as flowing from the dollar’s position as world’s No. 1 reserve currency.
But it’s the other way around… The dollar’s dominant position as global currency global is a result of America’s position as the world’s No. 1 military power.
In particular, the U.S. has the world’s most powerful navy.
It’s something geopolitical strategist and friend of Legacy Research Peter Ziehan talks about a lot with his subscribers.
Peter says the U.S. Navy is more powerful than the seven other most powerful navies in the world combined. And when you roll in the Japanese and British navies – staunch U.S. allies – it’s twelve times more powerful than its nearest rival.
For global trade to happen, there has to be a naval power that’s able to make that trade safe for all involved. And since the end of World War II, that’s been the U.S. Navy.
So, unless the U.S. loses a major naval war, the dollar will stay on top.
Here’s a list of past reserve currencies…
Spanish real in 16th and 17th centuries
Dutch guilder in the 17th and 18th centuries
British pound in the 19th and 20th centuries
U.S. dollar in the 20th and 21st centuries
Not coincidentally, these currencies were on top when the countries that issued them ruled the waves.
Spain had its Armada. Then the Dutch took over as the world’s supreme naval power. Then it was the Brits. Then it was America.
That’s why dollar doomism is overdone…
First, for the dollar to fall, another currency must take its place. And there just aren’t any suitable candidates right now. (Write me at [email protected] if you think I’m wrong about that.)
Second, the U.S. would have to stop being the world’s most powerful military power – particularly its most powerful naval power.
And short of losing a major naval battle, that’s a long way off.
It’s why, here at Legacy Research, we recommend currency trading. Sure, you can take a long-term view of what’s going to happen. But the money in the currency – or FX – market is made by trading moves that happen over just weeks… even days.
Even better, FX has a low correlation to the stock market…
So, you can make money out of FX no matter what the stock market is doing.
The other great thing about the FX market right now is it’s offering up its best opportunities in over a decade.
It’s something I’ve been writing to you a lot about in these pages.
And on Wednesday, April 19, at 8 p.m. ET, Market Wizard Larry Benedict is going live with his first-ever currency trading summit.
He says we’re entering a “chaos window” for currencies that we haven’t seen in years.
Larry plans to flip this chaos to his advantage by trading the big moves in currency markets right now.
So, no matter what happens with the U.S. dollar over the long run, he says currency trading will help folks make fortunes in 2023 and beyond.
You can automatically RSVP to Larry’s event here.
You’ll also get access to a series of how-to videos that will show you how to trade this often-overlooked market.
So, if currency markets are interesting to you… and you’re looking for a way to make money outside of stocks… make sure to join Larry next week.
Editor, The Daily Cut