Ep36. USD Dominance: Past, Present, and Future 美元主导地位:过去、现在和未来

USD is the world reserve currency and the most powerful currency in the world. Recently there have been a lot of discussions and debates about the gone of USD dominance. What is going on here? Here is my take.

The Past

How did USD become the world reserve currency? I think it is important to learn some history first. A few hundred years ago, most of the major economies have their currencies pegged to gold. In 1944, at the end of WWII, to provide stability to the post-war world economy, the Breton Woods system established the USD as the world reserve currency and pegged it to gold, other nations had fixed but adjustable exchange rates to USD.

However in 1971 due to inflation pressures and other economic and geopolitical reasons, the United States suspended the dollar’s peg to gold (ending of the gold standard) and allow the dollar and the other currencies to freely trade against each other. Since then, the value of USD was determined by supply and demand. However, USD was still used by most international trades (eg. oil purchase) and remained the world reserve currency. When nations use USD to make international trades, the USD is usually to US financial system through the investment of USD treasury bonds. 

The Present

Until today, the US is the most powerful country in the world and USD is still the world reserve currency. But why do people talk about de-dollarization now? One reason is in the last decade or so, through quantitative easing (QE), the US government has printed a lot of USD. This makes other nations nervous because more USD being circulated will dilute the value of the dollar. Another reason is in recent years, the US started to use the dollar as a weapon to sanction counties that they don’t like. So it can be risky to hold a lot of USD if the US doesn’t like you. We start to see news some emerging countries started to trade with their own currency or talk to Saudi to use non-USD to buy oil.

The Future

What will happen next? Will USD lose its dominance? As a retail investor, if we own a large portion of our portfolio in USD (as most of the popular funds are in USD), should we be worried? My answer is no, and here are my reasons: 1) De-dollarisation will be a very lengthy process (will take decades), especially since there isn’t any close competitor at the moment (Chinese Yuan is a controlled currency, Euro and Japanese Yen have their own set of problems and does any country want to use Indian Rupee or Russian Ruble to trade?). 2) The value of investment, in the long run, is mostly driven by underlying business value, and not the currency it is traded in. 

Some experts recommend reducing exposure to USD investment and starting to buy physical gold. In my opinion, one is better off sticking to his/her current investment stately, having a diversified portfolio, staying invested, and not too much worry about the future of USD, as no one knows what will happen.



美元是如何成为世界储备货币的?我认为首先了解一些历史很重要。几百年前,大多数主要经济体的货币都与黄金挂钩。 1944年,二战末期,为稳定战后世界经济,布雷顿森林体系确立美元为世界储备货币并与黄金挂钩,其他国家对美元实行固定但可调整的汇率。





接下来会发生什么?美元会失去主导地位吗?作为散户投资者,如果我们的投资组合中有很大一部分是美元(因为大多数受欢迎的基金都是用美元的),我们应该担心吗?我的看法是不需要的,以下是我的理由: 1) 去美元化将是一个非常漫长的过程(需要几十年),尤其是目前没有任何接近的竞争对手(人民币是受管制的货币,欧元和日元有其自身的一系列问题,是否有任何国家希望使用印度卢比或俄罗斯卢布进行交易?)。 2) 从长远来看,投资价值主要是由投资下的商业价值驱动的,而不是它所交易的货币。



For other topics on financial intelligence, you can find it here https://nickandmoney.com/category/fi/

Follow me on Twitter: https://twitter.com/nickandmoney

nick and money – improve your finances and wellbeing