U.S. Dollar Could Be Setting Up to Lose Its Reserve Status
The reserve status of the U.S. dollar is being challenged. If successful, as dire as this may sound, it could be the end of the U.S. dollar’s dominance.
The dollar became the most powerful currency in the world because of its use in global trade. With it, the U.S. government was able to get a sort of “superpower” status as well.
Why Could This Be Changing?
Not too long ago, President Donald Trump came out swinging at Iran. The previous U.S. administration had made a deal with Iran along with other countries. President Trump rejected that deal and imposed sanctions on the country.
Here’s the thing: Usually, countries would follow the U.S. and just stop doing business with the country being sanctioned. Why? Because it would be too difficult to do business without the U.S. dollar.
This time, something different happened.
The other countries that were in the deal refused to follow the U.S.’s lead. They insisted on creating a new system that eliminates the need for the U.S. dollar!
Just recently, foreign ministers of the European Union, Britain, France, Germany, Russia, and China decided to set up a new mechanism that would facilitate trade between European companies and Iran. (Source: “EU plan to sidestep Iran sanctions: How will it work?,” Deutsche Welle, accessed September 26, 2018.)
The new “mechanism” is called Special Purpose Vehicle (SPV).
SPV is a system similar to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is the current way of transferring money globally that relies heavily on the U.S. dollar. SPV plans to ditch the U.S. dollar and use the euro instead.
So What?
There are a few things to keep in mind here.
First of all, Britain, France, and Germany haven’t really challenged the dominance of the U.S. dollar in recent history. They were complacent, until now. This says that their sentiment could be turning against the greenback.
Then, know that Russia and China are also involved.
China has been under a lot of fire from the U.S. for unfair trading. Also, the country has been gunning to normalize the Chinese yuan. SPV could really come in handy for the country.
Russia has been trying to diversify itself away from the dollar. We have heard officials from the country hint this over and over again. The country has come under sanctions as well. SPV helps Russia, too.
Lastly, thinking from an even bigger perspective…
A few of the biggest economies in the world—Britain, Germany, France, China, and Russia—have just said, “Hey, we can bypass the U.S. dollar if we want to.”
This shows that they are losing trust in the currency, which may prompt smaller countries to do the same. Remember, the U.S. dollar is essentially holding its value because there’s trust in the currency. There’s really nothing more to it than that.
U.S. Dollar Outlook: Like an Elephant, It Will Make a Lot of Noise If It Falls
Dear reader, I am looking at this and can’t help but ask if the days of the U.S. dollar’s dominance are limited.
Mind you, the U.S. dollar is like an elephant. If it falls, it’s going to create a lot of noise and volatility in the process.
I stand in the camp that believes the decline of the dollar could very gradual at first, but will likely escalate once everyone loses trust in it.
I can’t stress this enough, don’t ignore these developments.