The US Dollar Isn’t Going Anywhere

An employee counts banknotes at currency exchange shop in Baghdad on Feb. 14, 2023. Murtaja Lateef/AFP via Getty Images

Commentary

China, Russia, and other countries want to drop the U.S. dollar, but there is no alternative.

In recent weeks, Chinese state media, cryptocurrency media, and other non-mainstream media have been running stories about how the world is abandoning the U.S. dollar as its reserve and trading currency. Other reports claim that the yuan is gaining internationalization, or that the BRICS [Brazil, Russia, India, China, and South Africa] grouping is set to issue its own currency, to move away from the dollar.

The other claim is that OPEC will either switch to the yuan, a composite currency, or the BRICS currency.

These claims are highly exaggerated. It’s always been a goal of Russia and China to move away from the dollar, and many nations resent Washington’s currency hegemony. But attempts to de-dollarize have proven impossible for numerous reasons, and the challenges seem insurmountable.

The first obstacle in abandoning the dollar is that countries would have to find or create an alternative. Currently, the U.S. dollar is the world’s most useful currency, accounting for about 90 percent of all currency trading. Additionally, just under 60 percent of all foreign currency reserves held by central banks are in U.S. dollars or dollar equivalents.

Most commodities, including oil, as well as most international trade, are priced in dollars, and more than 74 percent of foreign trade is settled in dollars. Because investors want to avoid currency risk, governments around the world issue most of their foreign bonds and sovereign debt obligations in U.S. dollars.

One common argument given for de-dollarizing is that the U.S. dollar isn’t backed by gold. While this is true, it’s also true of essentially all other currencies on Earth today. Paper currencies issued by governments are fiat currencies, meaning they exist by government fiat rather than being convertible into gold or silver.

What gives the U.S. dollar its value is that the U.S. government can tax Americans. The United States has more than 330 million people with a median household income of $69,500 annually. Because the IRS is very good at its job of collecting revenue for the U.S. government, any debt run up by the government can be repaid by taxing the American people.

Since there is no gold-backed currency in existence that could replace the dollar, the wealth of the American people and the full faith and credit of the U.S. government provide the best support for the currency. The other option would be to trust the full faith and credit of China, Russia, Brazil, India, or South Africa, all of which have smaller gross domestic products (GDP) and currencies that aren’t particularly useful outside their home market.

If the world demanded a switch to a gold-backed currency, the United States, with 8,133 metric tons of gold, has the world’s largest reserves. Germany, Italy, and France are next. Russia is in fifth place with just 2,299 metric tons. Next comes China with 1,948 metric tons. The total for Brazil, India, and South Africa is only 1,040. Consequently, the combined gold reserves of all of the BRICS countries—5,287 tons—are considerably less than U.S. gold reserves. So, even with a return to a gold-backed currency, the U.S. dollar would be the soundest currency.

Russian President Vladimir Putin (L) and Chinese leader Xi Jinping pose for a photo during the 11th BRICS Summit in Brasilia, Brazil, on Nov. 14, 2019. Sergio Lima/AFP via Getty Images

Ironically, most of the countries calling for the collapse of the U.S. dollar use the U.S. dollar to back their own currency, either directly or indirectly. The oil-producing nations of Jordan, Oman, Qatar, Saudi Arabia, and the United Arab Emirates all peg their currency to the dollar. While the yuan is pegged to the U.S. dollar, it’s allowed to fluctuate within a narrow band. Russia, India, Brazil, and South Africa don’t peg to the dollar, but their currencies are considered only partially convertible or nonconvertible, weakening their viability as international currencies.

Furthermore, the foreign exchange reserves used to back the currencies of all of these nations are primarily comprised of U.S. dollars and U.S. government debt obligations or Treasury securities. This means that the value of the currency and the wealth of these countries is predicated mainly on the quantity of U.S. dollars they hold. If the dollar were to collapse, so would the foreign reserves of these countries, driving their own currencies down as well.

A final hurdle in creating an international currency to replace the dollar is that all the world’s countries would have to agree. If BRICS made their own currency tomorrow, OPEC would have to agree to accept that currency for oil trades.

The European Union, ASEAN, and other trading blocs and nations would have to agree to accept that currency for trade. If they didn’t, the currency wouldn’t be very useful and wouldn’t be held in reserves. It’s very unlikely that the world would agree to use a brand new BRICS currency led by Russia and China. Therefore, the other option—the one Chinese leader Xi Jinping really wants—is for everyone to agree to use the yuan.

That raises the issue of sovereignty.

The very reason why many countries want to drop the dollar is to increase their economic independence. Adopting the yuan wouldn’t achieve this goal. These countries would be subjugating themselves to Beijing. Russian President Vladimir Putin has begrudgingly accepted the use of yuan in some trade with China because international sanctions prevent Moscow from using dollars. It’s unlikely, however, that he would give up the ruble. Although a BRICS member, India has an adversarial relationship with China and would reject any shift toward using the yuan.

As a result, the U.S. dollar will remain the global currency until all of these problems have been addressed. And so far, no one—not even Xi or Putin—has a solution.