U.S. Dollar: "Reserve Currency" Status in Danger?

Note: This article was written by our Head of Global Research, Murray Gunn. Murray contributes heavily to our monthly Global Market Perspective (GMP). GMP's 15 analysts, provide a complete picture of every major market in the world -- 50+ markets in total -- many of which are sitting at critical junctures. Get a global perspective today.

The U.S. dollar is the planet's top reserve currency. But for how much longer?

Rosneft, Russia's largest crude oil producer, has decided to switch all of its export contracts from being priced in U.S. dollars to European Union euros. The decision has been taken in order to protect itself from U.S. sanctions, imposed in various forms since Russia's annexation of Crimea in 2014. Russia, along with China, is increasingly examining ways to settle more international trade contracts in currencies other than U.S. dollars in order to provide insulation from the U.S.-led global financial system.

At first glance, one might think that these moves are temporary and a consequence of a deteriorating geo-political zeitgeist. Clearly, opponents of the U.S. accuse the country of swaggering around the world like it owns the place and using its reserve currency status as a political weapon. This was an accusation aimed at Great Britain a century ago as its Empire had reached its zenith and was starting an inexorable decline that led to Sterling losing its status as the world's reserve currency. Could the same thing now be happening to the U.S. dollar?

The evidence suggests that the U.S. dollar could already be on a downward trend in terms of its share of global central bank reserves. The chart shows that share peaked at 65.73% in 2015 and as of 2018 stood at 61.69%. It is expected to have shrunk again this year.

US Dollar chart

Let's not get too hysterical about it, though. The U.S. dollar will still be the world's dominant reserve currency for the foreseeable future. If the euro is to challenge that status, Europe will have to implement full fiscal union and that ain't happening anytime soon (if at all). As for the Chinese yuan, well the Middle Kingdom famously takes a long-term, patient view of things and will be happy with the drip, drip, drip of the U.S. dollar slowly but surely losing global relevance.

It took decades for Great Britain to lose its Empire and Sterling reserve currency status. With the same direction of travel, expect a similar story with America.