There have been doubts raised about the sustainability of the reserve currency status of the US Dollar over the past decade ever since the Fed started printing money to bail out the economy post the global financial crisis. But geo-political issues of 2022 have only amplified those voices as this article in The Market suggests. “A revolution in reserve currency thinking is under way. Sanctions against Russia have weaponized the dollar like never before. The shift away from a single-currency paradigm is accelerating” goes the sub-title of the piece.
“Tectonic shifts are happening on the currency front. Future historians might consider that the end of the dollar dominance as a reserve currency happened in February 2022, when the G7 countries seized 300 billion of Russia’s dollar and euro reserves. This has created a major precedent. The signal is that any country holding a big chunk of its reserves in dollar or euro is potentially in danger of having them confiscated in case of conflict.
Whilst the Euro to the Renminbi to even cryptocurrency (by some) were touted to be replacements in the past, it is now all about diversification without outsized dependence on any one currency.
“«We’re seeing a gradual erosion of the dollar», said Massimiliano Castelli, head of strategy for global sovereign markets at UBS, to the «Financial Times». «The picture that emerges is one of a multipolar currency system.» Central bankers believe that a move towards a multipolar world — away from a US-centric system — would benefit the renminbi. The notion of a strong currency used to be a Western notion. It is now becoming an Eastern notion. With the long-term devaluation of the dollar, the euro and the pound, the renminbi is the only superpower currency that is appreciating over time, instead of depreciating.
But we are not moving towards a renminbi-centered system. The key point is that nations will seek multipolarity in order to avoid being hostage to one particular monetary system. In other words, the aim is to avoid being vulnerable to the weaponization of a reserve currency, as in the case of the US dollar being used to sanction enemies. The very same goes for the euro. While it never reached the supremacy of the dollar, diversification away from the euro is already under way.”
This shift has implications for global trade, inflation and gold:
“Commodity importers like China are also aware of their need to trade commodities in their own currency or in a basket of different major currencies, but no longer in a single reference currency.
Another reason to diversify reserves is obviously inflation. A key characteristic of a reserve currency is that it is a stable store of value. That is now only theory. The dollar and the euro have been depreciating versus gold because of the massive money creation. Only 50 years ago, you needed 10 times less dollars to buy the same ounce of gold.
Logically, countries are seeking protection in gold.”
The author says however, this raises the risk of capital controls:
“The one who actually warned against this risk was Ray Dalio, the CIO of Bridgewater Associates, a year ago. He said that «if history was to be a guide, policy makers who are short of money won’t like capital movements out of debt assets and into stores of value, and could very well impose prohibitions of capital movements to other assets and other locations».”
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