Federal Reserve, said the nation's declining share of a growing global economy and the rise of the euro and yen mean nations other than the U. But the rising wealth of other nations doesn't spell doom for the U. It doesn't mean the U. The world's major reserve currencies are the U. Some reserves are also held in the Australian dollar, Canadian dollar and the Swiss franc. That suggests the greenback is likely to remain king—at least for the foreseeable future.
Gary Hufbauer, a nonresident senior fellow at the Washington-based Peterson Institute for International Economics, a Washington-based think tank, said the dollar faces four long-term threats to its standing as the world's key reserve currency. Hufbauer called the second threat "the widespread use of dollar-based financial sanctions to punish China, Iran and other 'bad boys' which in turn call into question the sanctity of dollar assets.
His last two threats come from overseas, with the third originating in the largest global rival to the U. Hufbauer's fourth threat is that the European Central Bank will take steps to make the euro an "attractive reserve currency" challenging the dollar's dominance.
The strength of the greenback increases when investors exchange other currencies for dollars, and when overseas investors buy American assets, including Treasury bonds and stocks.
During the recession sparked by the collapse of the subprime mortgage market, the U. As a result, U. But other advantages are more profound. Mint a few cents to produce. The same more or less goes for Treasury bonds. This produces some pretty astounding effects. Those ledger entries were granted in exchange for things like manufactured goods from China that have immediate material impacts on American quality of life. Eichengreen describes this as an "asymmetric financial system" with the international community "supporting American living standards and subsidizing American multinationals.
In theory, this is justifiable because dollars and bonds can in turn be used to buy goods back from America — both bills and bonds are essentially debts. But reserve currency status limits this backflow, because the dollars are held as a long-term store of value. Bonds, as long as they stay trustworthy, can stay parked in foreign banks for decades. But a run on the bank is also a possibility. Civil War — foreign nations would move quickly to trade dollar bonds for superior assets from U.
Such a rambunctious unwinding of the dollar would be hugely damaging. But that kind of collapse would most likely only follow events so catastrophic that reserve status will be the last thing on our minds. For France in the s, the death knell was out-of-control spending driven by the desperate attempt to hang onto the last shred of its Empire.
For England in the s, it was a full-scale Nazi offensive. But unless things were already really disordered in the U. But less appetite for dollars would make borrowing more expensive. That could be the biggest threat losing reserve status poses to U. Finally, the dollar also grants the U.
Global currencies are effectively in competition for use in trade and reserves, with convertibility and stability the key metrics. The landscape now is much different. The euro, the yen and the yuan all have some features that would make them viable global reserves, and China in particular has been aggressively pursuing greater international yuan flows for at least a decade.
But, despite some declines, the dollar has held on to its reserve and trade dominance. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Macroeconomics How the U. Dollar Became the World's Reserve Currency. Oil How Petrodollars Affect the U. Economics What Is Money? Partner Links. A super currency would replace the U. The USD is the abbreviation for the U. Nixon Shock Nixon Shock refers to the economic actions taken by President Richard Nixon in that eventually led to the collapse of the Bretton Woods system.
Read about petrodollar recycling and the history of the petrodollar. Forex Market Definition The forex market is where banks, funds, and individuals can buy or sell currencies for hedging and speculation.
Read how to get started in the forex market. National Currency A national currency is a legal tender issued by a central bank or monetary authority that we use to exchange goods and services.
What are the actual benefits you and I get by our currency being the reserve currency of choice across the globe? Before the dollar, other currencies have been the preferred reserve currency, but they were eventually replaced by another currency. This history shows us that no currency can keep the reserve status forever. So, the question is not whether or not the dollar will lose its reserve currency status but how close we are to that moment. To the world of commerce, the main benefit of having a world reserve currency is to keep international transactions running smoothly.
When everyone works with the same currency, trade becomes easier. Since the US is issuing the currently used reserve currency, our transaction costs are reduced. We are also not exposed to the same level of exchange rate risk, especially when it comes to commodities, which are often quoted and settled in dollars.
When more companies and individuals are using the dollar, it means more transactions are denominated in dollars. Another privilege of the dollar being the world reserve currency is the fact that it becomes easier for the United States to export its debt. Being a world reserve currency puts the dollar in higher demand because of the trust in the dollar. This makes dollar-backed securities e.
Countries tend to buy these dollar-backed bonds to increase the credibility of their own money supplies.
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