Is the US Dollar Still the World’s Number One Currency?

The U.S. dollar has been the world’s reserve currency for a very long time. It has been 80 years, to be exact, since the 1944 Bretton Woods Conference in idyllic New Hampshire, where 44 countries agreed the creation of the International Monetary Fund and the World Bank.

In practical terms this means that the dollar is the standard currency for a lot of international trade and contracts, and that central banks around the world hold dollars in their accounts for a rainy day. But there’s some change in the air.

Reserve Shift

Other currencies have been playing catch-up to the dollar: The euro and China’s yuan are getting increasingly popular as reserve currencies, in many ways because central banks also like to diversify their portfolios.

The dollar is still very clearly in pole position, representing just under 60% of global reserves, down from more than 70% some twenty years ago, and the euro at a distant second of about 20%, per data from the IMF.

The IMF data also shows that the falling share of U.S. dollar reserves is not actually being offset by other major currencies, but rather gold, as well as other nontraditional reserves like the Australian and Canadian dollar. According to a June survey by the World Gold Council, nearly a third of 70 central bank respondents intend to increase their gold holdings over the next 12 months, primarily to hedge against inflation and U.S. dollar exposure.

Dollar Dominance

Part of the dollar’s appeal as a reserve currency is the strength and stability of the U.S. economy. Even in the face of the pandemic-era woes, including spiking inflation and resurfacing worries about the economic outlook, the U.S. economy remains pretty healthy overall.

For Americans, the benefits of having the dollar be the world’s main reserve currency aren’t obvious in their day to day. Rather, many take them for granted: The dollar is liquid and stable, meaning we can use it to reliably buy things for more or less stable prices (even in the current inflationary environment). In theory, the dollar’s reserve status also means lower borrowing costs in the U.S. That’s because borrowing costs are determined by Treasury bond yields, which are in turn determined by demand, including from buyers like foreign central banks.

The dollar’s reserve dominance isn’t going anywhere anytime soon, but it’s worth keeping an eye on what the world is holding in its portfolio.

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