Making Cent$ Of the Dollar: Understanding the Challenges to Its Global Reserve Currency Status

Executive summary:

  • The U.S. dollar's share of foreign exchange reserves has been declining over the past two decades as central banks look to diversify their currency holdings
  • Despite this decline, the U.S. dollar remains central to international finance
  • While it is reasonable to assume that the U.S. dollar may gradually lose its preeminence, it will likely remain one of the dominant currencies for some time.

A growing chorus is writing about the challenges to the U.S. dollar's (USD) role as the world's global reserve currency. The debate about the dollar's demise is not new and reminds me of the Mark Twain quip that "the reports of my death are greatly exaggerated." We have seen this movie before. In 2010, the Federal Reserve Bank of New York (N.Y. Fed) published a note that, at the time, was in response to a growing view questioning the sustainability of the USD as the reserve currency, like today. The N.Y. Fed wrote1:

Recently the U.S. dollar’s preeminence as an international currency has been questioned. The emergence of the euro, changes in the dollar’s value, and the financial market crisis have, in the view of many commentators, posed a significant challenge to the currency’s long-standing position in world markets.

While the objections are more nuanced this time, the big difference is that the rise of social media means news travels faster, and narratives can perpetuate more easily. Indeed, based on Google Trends, searches for the "US dollar" have surged, surpassing inquiries related to inflation and recession. So why is there so much interest in the dollar now?

Chart 1

Google Search Trends

Source: Google Trends. As of April 2023.