Will the Dollar Remain Dominant?

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Will the Dollar Remain Dominant?

Will the dollar remain dominant? This topic has come up again in the last week or two with saber rattling taking place between the BRIC nations and President-Elect Donald Trump. If you’re wondering what the BRIC acronym stands for, it is Brazil, Russia, India and China. But there are other nations that have joined this economic consortium of sorts, including South Africa and Iran. The idea has been floated for some time that these nations might try and create a common currency to rival the U.S dollar. With President Trump firing back at this idea on Monday and threatening 100% tariffs on these nations this has caused a reoccurring question to bubble back to the top of mind for many: Is the U.S. dollar going to be replaced? I addressed this to some extent in an episode in April 2023 called “Will the dollar be replaced.” But let’s talk about it again, particularly in light of new information that we didn’t have almost two years ago. Here’s the short answer: Yes, the dollar will eventually be replaced as the reserve currency of the world, but not any time soon. I might add to that, maybe not even in my lifetime. I’m going to divide this episode into Part I and Part II. In Part I today, I’m going to give you 4 reasons why I don’t think there are any imminent threats from other nations’ currencies. In part 2, I’m going to talk about other threats that might surprise you that are not related to any country’s currency, and I’ll give you a sneak peek at how I think we’ll pay for stuff in the decades ahead.

1. The first reason I don’t think the dollar will be replaced anytime soon is that a common currency for multiple nations has already been tried by the European Union. A recent article on the International Monetary Fund blog indicates that the Euro commands roughly 20% of the world’s reserve holdings, while the dollar is still well above 50%. What is interesting regarding the Euro is that its market share of global reserves seemingly peaked at 30% back in 2010 and it has been declining ever since. If any rival to the dollar had a chance, it would have been the Euro. The European Union linked together geographically proximate countries with similar economic interests to pool their resources together. The results have been mixed. And holding that economic union together has become precarious, as evident by Britain’s exit from the European Union (at one time called Brexit). As a side note, certain economists predicted economic disaster for the U.K leaving the European Union. That didn’t happen. At least, not yet. This bolsters the case that certain strong economies may be able to stand on their own just as well, if not better, as those who decide to link arms and maybe even currencies.

2. The second reason I don’t think we have anything to worry about regarding the U.S. dollar is that BRIC nations do not have a history of economic cooperation. Many of the countries represented here are mavericks, with their own interests that are often at odds with the nations around them – even with their allies. Although the old saying is true, “the enemy of my enemy is my friend,” I think there are limits as to how far these alliances can go, and limits as to how long they will last. It is very possible that these nations introduce a new currency to compete with the U.S. dollar. But introducing a currency and the world buying into that currency are two different things. There’s also the major detail to work out as to who will be standing behind that currency. Will all of the participating nations have an equal share of responsibility to back the currency? Remember, national currencies are backed by the full faith and credit of the issuing nation. That’s what gives people confidence to use them and confidence that it will be worth something in the future. Where will that confidence originate from with a new world currency?

3. The third reason I think the dollar remains the dominant world currency for the next several decades is that BRIC nations risk the future of the own national currency if they jointly issue an alternative. Either that nation’s currency is replaced, or there are now two currencies competing. China has worked hard for its renminbi to become a player on the world stage. At its utilization for world reserves as grown. But it remains well below the Euro, Japanese Yen and British Pound, according to the IMF article shared earlier. As a matter of fact, it even seems to have stalled out in terms of growth in its usage. For China to work with other BRIC nations to create a new currency, it creates a rival for its own currency. For them to jettison their own currency to embrace the new joint currency, they would be forever economically tied to those nations, giving them very little wiggle room should the economic interests of those nations diverge (as they often do) sometime in the future. The introduction of a new currency by the BRIC nations could be more of a threat than a viable reality.

4. The fourth and final reason I think the dollar remains king for now is because of its head start. Inertia is a powerful thing and change generally doesn’t happen unless there is incredible incentive or opportunity for avoidance of pain. Barring a major world war, which typically causes a shift in the global order, the dollar’s head start will be hard to catch up with. I do think the dollar’s share of global reserves will continue to slowly decline, but I think it still has the global market share. At the end of the day, every person on earth must decide where they are going to store their value. Will it be in dollars (whether this is hard cash or money in the bank, it’s still dollars)? Or is there something that engenders more confidence? I don’t see a viable alternative. The U.S. Dollar is the least dirty shirt in the laundry, and as long as that remains the case, it will still be the reserve holding of choice.

I actually think there are other more viable threats to dollar dominance…and they are not other nation’s currencies. In next week’s episode we will talk about two other assets that I think will gain in popularity in the decades to come. You’ll have to stay tuned to find out what they are. In the meantime, I think you can have some degree of confidence that people are going to be willing to take your dollars. Now how much those dollars will buy you in the future may be much less, and we’ll talk more about that later, as well.

You want to make your dollars count, and we help people do that every day at Foundation Bank and McKenzie Banking Company. Whether you need to borrow money, manage money, or save money, we can help you do it better. Start your financial conversation with us at foundationbank.org. We also hope you’ll subscribe to this podcast in your favorite podcast app and share it on social media. These episodes are not recommendations specific to your own unique circumstances. Please consult your own advisors. Foundation Bank and MBC are a member FDIC and an equal housing lender, and until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on December 3, 2024. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.