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The Power of a Reserve Currency

October 21, 2020 By Mircea Vasiu

The world is changing at a fast pace. Several years ago, the concept of a digital currency was introduced for the first time. Early adopters made a fortune – Bitcoin, for instance, rose from literally zero to almost $20,000 at the end of 2017. Other crypto coins did the same.

Nowadays, to keep up with the developments in the crypto space, major central banks around the world prepare for the introduction of their own digital currencies. Soon, we may see the digital Euro, the digital Dollar, or even the digital Yuan or Yen.

Once a major central bank goes down that road, there is no way back to how it was before. Even the Bank for International Settlements (BIS), known as the mother of all central banks, issued a paper on central banks’ digital currency.

Are we close to another Bretton Woods moment?

The USD Supremacy at Stake

Conspiracy theorists have been singing the song of the USD dismissal for decades now. Yet, the USD is here to guide us out of the coronavirus crisis in 2020.

The truth of the matter is that the current generation and a few ones before do not know any other reserve currency than the USD. Therefore, it is difficult to imagine that something we are used to for generations suddenly may be at threat.

A close look at the history of reserve currencies reveals that almost every century had a different reserve currency. Some like the Spanish Real, the Florentine Florin or the Venetian Ducat extended their dominance over many centuries. Coming close to recent times, the British Pound lost its crown as a reserve currency in favor of the USD.

Only this time it is not that easy to replace the USD. No other period before saw the power of finances in the hands of one single nation as it is now.

Nowadays, the United States fights invisible wars. Wars that it often wins. For instance, by simply switching on or off the access to international financial institutions for one country, it puts pressure on it.

Most of the debt in the world is denominated in USD. Who has the key to USD printing, if not the US Fed and Treasury?

Furthermore, most of the foreign reserves kept by nations other than the United States are in USD. The second currency held as reserve is the Euro but at a staggering distance. Until all these changes, starting with the foreign countries’ demand for USD as foreign reserve, the dollar’s supremacy is not going away.

Long live the king dollar.

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