A New Reserve Currency?

Could the Euro, Yuan, Bitcoin or some new currency we've never even heard of become the next "world reserve currency?" Who decided that the US Dollars would be the reserve currency anyways and what does it actually do in that role? Does it matter and what would happen if the world found a new reserve currency?.

Every so often headlines will declare one currency or another as a legitimate challenger to US Dollar as the reserve currency for the world. Before we examine the likelihood of this happening, we need to understand just what is meant by the term "reserve currency."

Many nations have their own currency while some share, like the many nations of the EuroZone, and others simply adopt the currency of another nation. These nations then each have a central bank which is charged with forming monetary policy and pursuing economic stability. These banks need to hold a certain amount in reserves to accommodate trade. According to Eurochange.co.uk, there are currently 180 currencies in circulation in 197 nations around the world. Imagine trying to administer trades and sales and having to track that many different currencies and having to account for those which are extremely volatile.

When discussing the US dollars status as reserve currency, there are two important facets that must be touched on.

The first is as a store of value. Banks hold on to foreign reserves in case their own currency decreases in value. For this facet, the US Dollar is not the only reserve currency, though it is by far the largest. In 2021, according to the IMF nearly 59% of reserves were held in US Dollars while the Euro (21%), Yen (5%) and Pound Sterling (4%) also made up a significant portion of the world's reserves.

The second facet is its ability to facilitate trade. Trade is made much easier when central banks hold a significant amount of reserves in a particular, largely stable and widespread currency and conducts most trades within that currency. Vital commodities such as oil, wheat, corn and cotton and are priced in US dollars to reduce volatility and simplify trade.

While the portion of global reserves stored in US Dollars has been decreasing from a high of 85% in 1970, the larger threat is losing its place as the great facilitator of global trade. In many ways, the past several years have seen a significant pullback from the globalization sought in previous decades. The world is re-dividing into spheres of influence and the United States' ability to probe into and assert its own will within each sphere is waning.

Nowhere is this more evident than in the BRICS nations of Brazil, Russia, India, China and South Africa. Former Russian Prime Minister Dimitry Medvedev pointed out that these nations may seek to protect themselves from foreign obstruction:

"The best protection against the rotting euro will be the transition to new payment methods in trade with our reliable partners, including through the use of national currencies - the Russian ruble, the Chinese yuan, the Indian rupee, etc. In the future, the creation of a new reserve currency of BRICS countries is also possible. The dollar, euro and pound sterling are clearly not enough for the modern world."

If the push for globalization and one-world policies has peaked and is now waning, then the real possibility exists that various nations will forge trade networks apart from those spearheaded by the US.

It would only be logical that these nations would then seek out ways to support their own networks through either the establishment of new "reserve currencies" or through the promotion of an existing currency to that status.

It is unlikely that the world will stop seeking stability in the US Dollar in the immediate future. However, as polarization continues to increase, it is very likely that more currencies will find greater usage and challenge the very concept of having a single reserve currency. This would mark one of the greatest financial shifts in modern history and is a story worth monitoring. If you have thoughts on what the future of the US Dollar or other currencies may look like, please feel free to let us know in the comments.