The US dollar is an immensely powerful currency. Similar to how English is the world’s most preferred language for business, the dollar is the most coveted world currency. This is simply because of how strong the dollar is. The dollar gets its strength from its status within the global currency reserve. However, CNN reported, that the US dollar’s position at the global reserve may be about to change and that change could put it in a very precarious position and cause its value to starkly plummet.
To understand why this may happen, it’s first important to understand the function that the global currency reserve serves. Think of the global currency reserve as a shared savings account between all the countries of the world. It is a savings account that houses that particular country’s “just in case” money should things in their country go seriously awry. Since the dollar is so powerful, many countries choose to put money aside in US dollars instead of their own currency. The global currency reserve is also an entity that facilities global business transactions. In terms of global business transactions, the US dollar is, once again, the preferred currency.
The circumstances above are what contribute to the dollar’s powerful presence. In fact, at present, over 60% of all global currency in the reserve is held in dollars. This gives the United States and the US dollar a very unique ability. Essentially the US can cut off access to the 60% of the world’s funds that are housed at the global currency reserve. The United States exercised this power recently. They cut off Russia’s access to the dollar.
That decision, while it was an advantageous maneuver in an attempt to choke Russia’s financial power, is also one that could cause the dollar’s value to depreciate at an exponential rate. Why? Because other countries are now scared that the US will do the same to them. Michael Hartnett, who is a financial strategist for Bank of America, pointed to the risks that go along with the “balkanization of global financial systems.” He highlighted the potential for the US dollar to go into a worth decline.
Another concerning trend identified by the International Monetary Fund (IMF) pertains to the dollar’s share itself at the global currency reserve. The IMF noted that while the dollar still remains the dominant currency at the reserve, its share has been declining over the past two years. In contrast, China’s yuan has been gaining share momentum.
Despite all of the concerns surrounding the fate of the US dollar, there isn’t a need to get too frightened just yet. International investments in United States’ businesses are still on the rise. In fact, it’s growing at an exponential rate. In 2021, direct foreign investments grew by an impressive 77%. If countries still have that much faith in the stability and potential of the US economy it’s likely that none will be too quick to jump ship when it comes to their stake in the global currency reserve.