End of the Dollar? Don’t bet on it in the near term!

There is a lot of talk lately about the end of the dollar as a leading currency and the rise of alternatives from Bitcoin to gold. I believe some of this talk very much exaggerated. It is of importance to distinguish the different roles of the dollar, first as a reserve currency and second, as a payment currency.

In the first case of functioning as a reserve currency, you need to know that no central bank holds a large number of cash dollars in bank accounts in its reserves. They hold dollar-denominated securities, mostly short-to-intermediate term U.S. Treasury bills and notes. In that capacity, the dollar will be difficult to displace. There exists simply no alternative. There is no securities market in the world big enough, liquid enough and with the right combination of maturities, repo facilities, futures, options, settlement, clearance, dealers and rule of law to absorb global savings other than the Treasury market. The dollar may be displaced one day, but not in the near future. It will take decades for an alternative sovereign securities market to duplicate what the U.S. Treasury market offers.

In the second case, as a payment currency, this could be a completely different matter. Almost anything can serve as a payment currency as long as two or more parties are willing to accept it from each other in exchange for goods, services or investments. The balance of payments will need to be settled up periodically, and that net settlement might be done in an asset class other than the payment currency including gold. All of the anti-dollar developments in the world today revolve around the utilization of new payment currencies.

There are movements between Saudi Arabia and China accepting yuan as payment for oil. The BRICS+ organization is studying the creation of a new payment currency whose value will be tied to a basket of commodities. Russia is discussing with India to accept Rupee for payments. This is all part of a trend involving Russia, China, India, Iran, Turkey and others to conduct business in imports, exports, services and investments in currencies other than U.S. dollars.

This does not mark the end of the dollar as a payment currency or a reserve currency. Still, it is a step in that direction. And due to less demand world-wide, the dollar may fall.

Sven Franssen