The US dollar has been the world’s de facto reserve currency for 80 years. When it was chosen as the world reference currency at the Bretton Woods conference in 1944, it was the world’s second reserve currency, after the UK’s pound sterling, which was the dominant reserve currency for much of the 19th Century and the first half of the 20th Century. Since then, the dollar has more or less reigned supreme.
While other reserve currencies are held by countries around the world, including the Euro, Japanese yen, and Swiss Franc, the dollar remains the preferred reserve currency. This is largely due to the stability that its scale and liquidity bring. In fact, the dollar accounts for 58% of the value of foreign reserve holdings worldwide. The Euro, the second-most used currency, only accounts for 20% of such holdings.
However, just because the dollar is the dominant reserve currency now, it doesn’t mean that this will always be the case. There’s an argument to be made that the dollar will have never faced as much sustained competition as it will in the coming years. And if that competition gets just a few things right, the dollar may diminish significantly.
International competition
But what threats are there to dollar supremacy? And how serious are they in the long term?
Perhaps the biggest challenge to the dollar comes from the US’ main economic rival: China. Among other things, it’s leading efforts to establish a BRICS Plus-based equivalent to the SWIFT network.
Standing for the Society for Worldwide Interbank Financial Telecommunication, SWIFT isn’t actually a means of moving money. It’s simply a universal messaging system that banks use to send instructions to other banks. The standardisation that it offers minimises translation costs as well as the need to confirm the identity of counterparties and customers.
The SWIFT network is also dominated by the dollar. According to the Centre for Strategic and International Studies (CSIS), the US currency accounted (by value) for 41.8% of payment instructions transmitted by SWIFT in 2022. An alternative payments network, particularly one that includes economies as large as China, India, Russia and several other BRICS Plus members could prove disruptive to that status quo.
The BRICS payment network is a digital payment system designed to streamline cross-border transactions among BRICS nations—Brazil, Russia, India, China, and South Africa. It allows users from these countries to conduct international payments using their own currencies, reducing global reliance on the US dollar. This system aims to reduce transaction costs, simplify transfers, and strengthen economic ties among BRICS members by offering a unified payment platform.
It’s worth noting, however, that China has been trying to establish an alternative payment network since at least 2015. Whether framing that network in the BRICS-Plus context results in additional traction remains to be seen.
Economic fundamentals
Another threat to the dollar’s dominance is the US economy. Given that it’s still the world’s largest economy by some distance, this might seem like a strange statement. But there are cracks in its foundations.
Rising US debt, for instance, could raise concerns about the long-term sustainability of the dollar, particularly in the event of a prolonged recession. Sanctions and trade wars could also do damage to the US currency, and if Donald Trump is elected again in November, we’ll likely see an escalation in the country’s trade war with China.
Other fissures in the US economy include a decline in labour productivity and the fact that much of its economic growth over the past decade or so has been predicated on a tech boom. So important has tech become to the US economy that a group of seven technology giants (commonly referred to as The Magnificent Seven) has profits that now exceed the GDP of almost every country in the world. They also account for 35% of the S&P 500, one of the world’s most invested-in indexes.
But those companies owe much of their growth to the low interest rates and tax breaks that were prevalent after the 2008 financial crisis. In the coming months, many will have to renegotiate their debt, and a fair few tax breaks are set to expire. If those factors impact the performance of The Magnificent Seven, the US economy will feel the damage, and the dollar will be impacted.
Incidentally, it’s this kind of variability within even the most stable of currencies that crypto evangelists point to as a reason to abandon traditional currency forms. While their point may be broadly true, crypto hasn’t proven anywhere near as disruptive to the power of the dollar as its fiercest adherents believe.
South African implications
With some idea of how the US dollar might be supplanted as the world’s most used reserve currency, what implications could this scenario have for South Africa? Given how important a trading partner the US is to South Africa, it will likely cause serious economic disruption, particularly in the short term. Aside from trade flows, things like borrowing costs could also be impacted.
Much would also depend on the currency that replaces the dollar. As a part of BRICS, South Africa might be cushioned if a BRICS currency (currently still in the proposal stage) takes the top position.
For businesses and individuals, any change could have serious implications around competitiveness and purchasing power. That’s especially true when it comes to making international payments. However, by using an international money transfer provider that prioritises transparent pricing, automation, and expert-led customer service they can mitigate some of these challenges.
Given that many of the issues raised above already exist to some degree, why not do this now instead of waiting for a possible decline in the dollar’s international standing as a reserve currency?