We may well be having an “economic moment” where the American dollar goes the way of the pound before it. The US dollar is losing its lustre as the world’s reserve currency. Rachael Bolton Richard Holden Economics professor May 14, 2025 https://www.afr.com/policy/economy/...lobal-reserve-currency-status-20250513-p5lyx0 Cars need petrol or electricity to go. Those flume rides at amusement parks need water. And most of us need coffee first thing in the morning to function. Similarly, the world’s financial system needs a unit of account – a benchmark – to facilitate economic activity. From investment to trade to a store of value, a “global reserve currency” is the sine qua non of global finance. Before World War II, that currency was the pound. Since then, it’s been the United States dollar. About 60 per cent of the world’s central bank currency reserves are in dollars. The euro is a distant second with 20 per cent of reserves. The Japanese yen is third at just 5 per cent. Ninety per cent of foreign currency trades involve US dollars. And 60 per cent of foreign currency debt issuance is in dollars. This has been very good for the US. It allows them to borrow more cheaply. It permits them to finance higher levels of debt and larger budget deficits than they otherwise could. And it gives them the power to enforce sanctions on bad actors since effectively all international capital flows run through US banks at some point. They’ve used this to great effect against countries ranging from Iran to Russia. Being in control of the global reserve currency puts the US in an enviable position. So enviable, in fact, that as long ago as the early 1960s, French finance minister (later president) Valery Giscard d’Estaing gave it a name – suggesting that the global reserve currency status gave the United States an “exorbitant privilege”. I don’t know about “exorbitant” – perhaps that’s a little French exuberance. But it’s definitely a privilege, and a pretty good one. It’s not just good for the US, though. It’s good for everyone. As the famous scholar of international financial crises, the late MIT economist Charles Kindleberger observed, it’s important to have a country that will provide “liquidity when the monetary system is frozen in panic”. The US dollar’s status as the global reserve currency began in the wash-up of World War II. The entire postwar financial order was crafted by the US and its allies at a conference in Bretton Woods, New Hampshire, in 1944. The Bretton Woods agreement involved the US dollar being pegged to gold, and other currencies being pegged to the US dollar. Market reaction to Donald Trump’s “liberation day” tariffs was indicative of genuine concern about the prospects of the US dollar remaining the global reserve currency. Bloomberg The US was clearly the world’s dominant economic power at the time – and would be for the foreseeable future. Europe lay in ruins. Britain was bankrupt. China was decades away from the beginning of its economic rise. It’s hard to overstate how dominant the US economy was. And, crucially, the US had sound political and economic institutions. As the former Federal Reserve chairman and former US Treasury secretary, Janet Yellen, put it 78 years later: “The dollar’s international prominence is strongly supported by US institutions and policies; US economic performance; open, deep and liquid financial markets; rule of law; and a commitment to a free-floating currency.” It’s a little scary to think that Yellen delivered that speech only three years and one month ago. Indeed, the market reaction to Donald Trump’s “liberation day” tariffs was indicative of genuine concern about the prospects of the US dollar remaining the global reserve currency. It’s easy to understand why investors sold equities when the tariffs were announced. Stocks had become riskier, and corporate profits and economic growth would be hammered. Usually, when that happens in the US, investors buy bonds as a kind of insurance. That drives down bond yields while the US dollar appreciates. But something different happened this time. US bond yields went up and the US dollar went down. That’s not been the market reaction to risk in the US economy for the past 80 years, even during the 2008 financial crisis. What’s the alternative? The pattern we saw after Trump’s tariffs is the pattern we normally see in emerging markets and banana republics. People aren’t distinguishing between stocks and bonds. They’re wondering whether the country is a safe bet any more. And if investors decide that the US really is not a safe bet any more, then central banks aren’t going to park their reserves in dollars. Investors are going to be reticent to buy US government debt. And people who trade goods internationally are going to start looking for an alternative currency in which to do it. The unthinkable has suddenly become thinkable. The US no longer has a stranglehold on its status as the global reserve currency. That raises the question of what the alternative is. And, to be fair, it’s not obvious that another currency can immediately step into the role. As another former Treasury secretary, Larry Summers, has quipped: “Europe is a museum, Japan is a nursing home, China is a jail, and bitcoin is an experiment.” He’s right, of course. But it would be a mistake to underestimate China. Yes, they lack the traditional rule-of-law bona fides. But how’s the US looking on that score these days? And China has one unique and intriguing plus in its column. It has developed and substantially rolled out a central bank digital currency – the e-CNY (or digital renminbi). It works just like regular currency, but it facilitates so-called “web3”. Smart contracts, programmable money, instantaneous international currency transfers and “atomic swaps” – an automated contract that allows two parties to trade tokens from two different blockchains. I wrote about this at length in my book Money in the Twenty-First Century. The US dollar will remain the global reserve currency for now. But for the first time in 80 years, it no longer looks like a sure thing for the next several decades. Evolutionary biologists have a concept called “punctuated equilibria”, where the evolution of a species can proceed in a leap, rather than gradually. And legal scholar Bruce Ackerman has spoken of “constitutional moments” where there can be great change to constitutional arrangements in a short period of time. We may well be having an “economic moment” where the US dollar goes the way of the pound before it.
Chinese are risk takers so they can overtake the US but it could take awhile. Social Democracies are good for it's citizens but it produces happy people that don't take risks. Europe & the Anglosphere do not take risks that's why they can't overtake the US.
Trump has destroyed western Alliances so other Nations are now looking more favourable. Loyalties to the U.S. have been replaced by, "well maybe China isn't so bad after all, considering what Trump is doing and is". This is a definitive turning point in history. Trump has sped up China's ascendancy to Global domination.