Is the U.S. Dollar at Risk of Being Replaced by Another Currency? (2024)

Since World War I, the U.S. dollar has effectively been the world’s global reserve currency due to the country’s willingness to maintain this status, in addition to its sheer volume and stability of trade. More recently, the war in Ukraine, and the sanctions placed on Russia as a result, have caused countries like China and Russia to work together on a financial resolution to trade effectively. Now Russia, and more recently, some emerging market countries like Iran, Brazil, and Argentina, have decided to establish trade in currencies other than the U.S. dollar.

The shift of some countries to using their own currency for international trade is not a new phenomenon. China has wanted to gain flexibility over the U.S. related to trade efforts by becoming less reliant on the U.S. dollar for some time now. The beginning of the Russia/Ukraine war was the catalyst needed for China and other countries to further entrench this vision for greater trade flexibility. But what could this do to impact the U.S. dollar’s dominance, and should the U.S. be worried?

Historically, U.S. government bonds (also known as Treasury bonds) have a relatively low-risk profile and low cost to trade for non-U.S. countries. The fear is if these countries begin using an alternative currency to the U.S. dollar, there could be a substantial decrease in the trading volume of U.S. treasuries. If there’s less demand for U.S. dollars, and therefore Treasury bonds, this could cause the price of the bonds to fall and yields to rise. It could exasperate the already high inflation our country has experienced due to higher interest rates. The reason higher rates could cause higher inflation is that higher interest rates make obtaining mortgages and loans more expensive for consumers and borrowing for projects more expensive for businesses. When more money gets spent on the same amount of goods, it tends to have a direct impact on inflation.

While it is difficult to quantify the specific impact a shift of trade volume away from the U.S. dollar would have on the Treasury market, we do have a good idea of where each country’s currency reserves are today.

The Federal Reserve Board data, as you can see in the chart below, shows how strong the U.S. dollar is in comparison to other countries. By a landslide, the U.S. maintains the largest percentage of foreign exchange reserves relative to other countries’ domestic currency reserves.

The shift away from the U.S. dollar as a global reserve currency does not appear to be a cause for increasing concern as it is tremendously unlikely another currency will build enough influence and economic infrastructure to directly challenge the greenback. In fact, a significant number of countries, both emerging and developed, rely on the U.S. dollar to function as an economic entity on a day-to-day basis. These countries could not shift away from the U.S. dollar without significant domestic economic volatility.

A complete global changeover to another currency would certainly take a great deal of coordination between all major global economies. Such changes would encompass a fair amount of time and money to create and would likely take decades to implement on a global scale.

If you’re concerned about how this could impact your own retirement, you can reach out to Bernicke Wealth Management to schedule a complimentary consultation with one of our Certified Financial Planner™ professionals.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted.