The demise of the Dollar has (probably) been greatly exaggerated

Pieces of Eight is another name for the Spanish Peso, which was worth eight Reales (the official Spanish currency). It was minted in 1497 and became the first international currency, due to the strength of the Spanish Empire and also because of its uniformity in standard and milling characteristics. 

The US Dollar was, in fact, based on its Spanish predecessor. The British Pound enjoyed a stint for about one hundred years as the world’s reserve currency, until it was deposed by the US Dollar after the Second World War.

All global currencies have their time in the sun, but eventually, they fall from grace.

In the last few months, news articles have been increasingly focusing on the theme of “De-dollarization”. The narrative goes like this: As political alternatives to US hegemony rise, countries not wishing to be a US ally exchange their Dollars for gold or begin trading commodities in their local currencies. US sanctions on Russia sped up this process, as it became clear that the currency was a potential weapon, not just a medium of exchange. Unfettered money printing for over fourteen years has also caused the Dollar to lose its value.

As China focuses more on its internal market, it has a smaller need to buy US Treasuries with its excess reserves, thus greatly reducing global demand for the US greenback. Indeed, we have seen both high demand for gold by central banks and also some reduction in global USD reserves.

We believe there’s some merit in the argument however, proponents of the theory don’t take into account the time it took for global reserve currencies to be replaced. Spanish Dollars weren’t knocked off their perch until more than a century after the 1701-14 War of Spanish Succession diminished Spain’s global clout. And British Pounds remained a global medium of exchange for more than twenty years after the First World War caused its own empire to shrink. Also, despite the de-dollarization trend, the US Dollar is still near 60% of global currency reserves, well over three times the Euro (which is held mostly within the Euro group).

Additionally, the US is, and remains the world’s most formidable military organization, outspending combined China, Russia, Saudi Arabia and Iran by almost 2:1 every year. Assuming that a global reserve currency is usually backed by a global-calibre military, it’s hard to see how it may be replaced by others.

We don’t doubt that the US Dollar’s hegemony will eventually end, and that the currency would be replaced by another. However, this process could take decades. For the time being, whenever Asia experiences a crisis, consumers run for US Dollars. For the time being, our bet would be that the only real alternative to the US Dollar would happen not because the US would lose some trade or other war, but due to the rise of some sort of global digital currency, possibly with the blessings of the US Treasury itself.

George Lagarias, Chief Economist