Is the US dollar losing its reserve currency status?

The recent geopolitics events triggered an interesting debate in financial markets. When Chinese President Xi Jinping visited Moscow in March, Vladimir Putin said he favors the yuan, the Chinese currency, to conduct trade.

Immediately after, financial media outlets started questioning the US dollar’s reserve currency status. Is the dollar in danger of losing it?

What is the reserve currency status?

A reserve currency is one that other countries hold for use in international transactions. Also, a large percentage of commodities are priced in the reserve currency.

Moreover, such a currency facilitates global transactions. Therefore, it makes sense for a nation to hold a reserve currency because it reduces the exchange rate risk.

The US dollar has been the de facto world’s reserve currency since the Bretton Woods agreement. True enough, its share of global reserves declined in the last ten years, now sitting at 58%. But even so, it has a dominant role when compared to other options.

What other alternatives to the US dollar exist?

Many other reserve currencies exist, but none comes closer to the US dollar. Such currencies are the euro, the yuan, the yen, or the British pound. The euro, for example, is in second place, with a 20% share of global reserves.

The Chinese renminbi, or the yuan, was shown as an alternative after the visit to Moscow. But as the chart below shows, the difference between the two is huge. While the US dollar is in decline, the yuan’s share of global reserves is almost insignificant.

How about gold?

Some said that gold is a great alternative for holding international reserves. After all, gold is up YTD in every currency and even outperforms most domestic stock indices.

But such statistics are taken out of context. In reality, gold has been in a long-term decline as a reserve asset.

To sum up, there is no real alternative to the US dollar. The problem is that all other fiat alternatives are worse than the US dollar – the euro lost ground in the last decade, and the rest of the currencies don’t even have 5% of total allocated reserves.