I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Saturday Reflections, I take time out to reflect.
The U.S. dollar is the primary global reserve currency, which means that it is the default currency for global trade, especially in oil. Relevant historic events:
- The Bretton Woods agreement in 1944 that pegged currencies to the U.S. dollar, backed by gold.
- The collapse of the Bretton Woods system in the 1970s system, when Nixon suspended the dollar’s convertibility into gold, shifting the world to a fiat currency system.
- The initiation of the petrodollar system in 1973 and 1974 following the collapse of the gold standard, established via a deal between the US and Saudi Arabia. Saudi Arabia agreed to price oil exclusively in US dollars and invest surplus revenue in US Treasuries, ensuring demand for the dollar. This allowed the dollar to continue to serve as the reserve currency even post Bretton Woods.
Because the U.S. prints the reserve currency, they have a position of privilege that no other country in the world enjoys. Some call it exorbitant privilege.
From Twitter, this is a bit hyperbolic but largely accurate:
How do we export inflation? The U.S. can run significant deficits by issuing Treasury bond debt and then the rest of the world buys it. This supports the dollar’s value, as everyone must have dollars to buy Treasuries. The strong dollar makes imports cheaper. The U.S. government doesn’t have to cut spending or raise taxes or “print money” (the Fed buying the debt itself). Monetizing the debt like that is a recipe for inflation. But the U.S. doesn’t have to worry so much about inflation, because everyone wants our dollars, and our Treasuries… for now.
If the conflict in the Middle East provides a wedge that weakens the world’s dependence on the U.S. dollar, that opens the door for another reserve currency to rise.
In February, China’s leader Xi Jinping explicitly called for the Renminbi to become a global reserve currency. However, for this to actually happen, China would have to give up major control of their economy. They would have to run a trade deficit (send out more Yuan than they take in) and allow free flow of capital.
So far China’s ambitions with respect to their currency in practice remain limited:
China’s approach has remained incremental and corridor-based. Expanding transactional use allows Beijing to gain some of the benefits of currency reach while postponing the macroeconomic and political burdens that come with supplying a global reserve currency. Xi’s announcement makes that tension explicit. It raises the question of whether China is ultimately willing to accept those burdens or whether it will continue to seek influence without full exposure.
Xi’s statement does not resolve these tensions. China can keep expanding renminbi settlement and trade finance while maintaining a managed capital account, and that trajectory is already visible in specific corridors. But reserve status requires predictable rules and a credible right for outsiders to move money in and out when conditions deteriorate. The takeaway is clear. The renminbi can become more common in global commerce without becoming a true reserve currency. Whether China reaches that threshold will be decided by how Beijing governs access when markets tighten, not by what it declares when they are calm.
Currently, the United States is no longer a trusted player on the world stage. In 2022, it seized Russian reserves, showing that it wasn’t above using its reserve currency status in a wartime situation. Sanctions against Iranian oil and now a loosening of such sanctions (as well as a loosening of sanctions on Russian oil) shows that the U.S. prioritizes its own interests above all, and without any sense of diplomacy or allyship.
However, it’s not clear what alternative might replace the U.S. dollar. In a fourth turning, institutions are torn down so new ones may emerge. Perhaps that’s what will happen in the next ten years with the world’s reserve currency.