What if the US dollar

loses its status as the

world's reserve currency?
Roland Berger Institute

August 2023
2 What if the US dollar loses its status as the world's reserve currency?

No matter the metric, the US dollar clearly is the major global currency –
This status has both upsides as well as downsides for the US economy

SHARE OF USD AND OTHER CURRENCIES IN THE THE WORLD'S RESERVE CURRENCY AS AN EXORBITANT PRIVILEGE?
INTERNATIONAL MONETARY SYSTEM, 2022 [%] ADVANTAGES AND DISADVANTAGES FROM US PERSPECTIVE

88.0 Advantages
• High and constant (foreign) demand for USD strengthens the currency, thereby
making imports of foreign goods to the US cheaper
• Reduced borrowing costs as there is constant demand for US treasuries from
countries that want to invest their USD trade proceeds
• No exchange rate risks for the US as emitting country of the USD
58.4 • Increase in financial stability, as the US is a preferred destination for capital in
times of global financial turmoil, making it less vulnerable to global shocks
47.8 • Increased economic power and geopolitical influence: As the reserve currency,
the US dollar gives the US a powerful economic and foreign policy tool, allowing
the US government to exert influence over other countries through economic
38.3
policies, trade agreements, and sanctions
31.0

20.5 Disadvantages
17.0 • The reserve currency status of the USD makes trade deficits more likely because it
13.0
creates demand for dollar-based assets and treasuries, boosting the dollar exchange
7.0
5.5 4.9
7.4 rate, weakening the export industry, and ultimately resulting in trade deficits and
2.7
1.3
potential job losses
0.6
• During times of economic turmoil, investors seek the safety of the dollar, thereby
USD EUR JPY GBP CNY USD EUR JPY GBP CNY USD EUR JPY GBP CNY squeezing US exporters at an already difficult time
FX TURNOVER 1
COMPOSITION OF INTERNATIONAL DEBT • Artificially low borrowing costs lead to (too) high private and public spending,
FX RESERVES DENOMINATION thereby creating asset bubbles

1  
Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies
totals 200% instead of 100%. Adjusted for local and cross-border inter-dealer double-counting (i.e. "net-net" basis)

Source: BIS; IMF

3 What if the US dollar loses its status as the world's reserve currency?

The dominance of the US dollar has been built on the strong role of the US following
World War II – In more recent times, the dollar's dominance is being challenged

TIMELINE OF DOLLAR DOMINANCE

China ramps up the use
of CNY for trade, other
EM economies1 follow
Dollar-gold Establishment
China has announced to
convertibility ceases of the eurozone
foster the use of the
President Nixon enacts a With the creation of the renminbi in bilateral trade,
stop to the USD-Gold eurozone, European e.g. with Saudi Arabia and
Bretton Woods Russian de-dollarization
convertibility in order to countries hope to UAE. Other EM countries
Agreement
address the country's counter-balance the USD. In response to the barrage also announced to rely
USD is pegged against the inflation problem and to However, the euro did not of western sanctions more on the CNY in
gold price and over 40 discourage foreign live up to its promise – following the annexation international trade,
other major currencies are governments from today it is only slightly of Crimea, Russia starts including when China is
pegged against the dollar redeeming more and more more relevant than the de-dollarizing its economy/ not involved, e.g. Brazil
to foster international trade dollars for gold German mark used to be trade or Bangladesh

2007- FEB APR

1920s 1944 1960s 1971 1981 1999 2014
2008 2022 2023

US dollar takes up the Large USD supply is 80s sees strong inflation Global Financial Crisis War in Ukraine
race with the British becoming difficult to (GFC)
The US dollar records a Western sanctions boosted
pound sterling back with gold
loss of two-thirds of its Investors flee to the dollar, Sino-Russian cooperation
After WWI, the USD European and Japanese purchasing power after expecting it to keep its and cause Ruble-yuan
replaces the GBP, which exports are becoming multiple years of high value, highlighting the trade to increase 80-fold.
had prevailed until then, as increasingly more inflation dollars status as a safe Central banks around the
the world reserve currency. competitive with US haven world increased their gold
The US records a exports. As the amount purchases and diversify
significant inflow of gold, of USD increased, it gets away from the USD
as allies settle wartime more difficult to back
payments in gold dollars with gold

1  
EM refers to Emerging Markets

Source: Desk Research

4 What if the US dollar loses its status as the world's reserve currency?

Although the US dollar's relevance has declined over past decades,

its status as the global reserve currency remains hard to challenge

Over the past two decades, the USD share of globally CURRENCY COMPOSITION OF GLOBAL ALLOCATED FOREIGN EXCHANGE RESERVES
allocated foreign currency reserves has declined by [%]
around 10pp. to just below 60%.

Recent efforts by some emerging market countries –

led by China – to move away from the dollar as the 100% 100% 100% 100%
world's reserve currency are rooted in the fact many 1.8%
3.5%
countries are concerned that the US is increasingly 2.9% 7.7% 10.7% Non-traditional currencies
4.3%
6.3% 3.0% 4.4%
using the dollar and its prevailing reserve system as a
4.9% GBP
weapon against other states. 5.9%
5.5% JPY
17.5%
27.1%
The seizure of Russian FX reserves in Western central 20.1%
bank accounts in the aftermath of the Russian invasion 20.5% EUR
of Ukraine has startled large reserve-holding countries.
As a result, many countries have reduced their USD
holdings and started buying gold instead.

Countries like Brazil, Russia, India, China, South Africa

(BRICS), some ASEAN nations, Kenya, Saudi Arabia, 71.5%
and the UAE are now also pushing to use local 62.2% 61.9% 58.4% USD
currencies in trade.

"Every night I ask myself why all countries have 2000 2010 2020 2022
to base their trade on the dollar. Why can't we
do trade based on our own currencies? Who was
it that decided that the dollar was the currency
after the disappearance of the gold standard?"
Brazil President Luiz Inácio Lula da Silva, April 2023 Source: IMF
5 What if the US dollar loses its status as the world's reserve currency?

However, liquidity of non-traditional currencies has increased over the past decades,
making it easier for countries to circumvent the dollar

Historically, only a handful of countries possessed deep TRADING IN ALTERNATIVE CURRENCIES HAS RECENTLY
and liquid markets for domestic currency assets that BECOME MUCH EASIER
were open to the rest of the world.
Forex trading volume of selected Development of amounts traded
Since the early 2000s, there has been a massive currencies [USD bn] via central bank bilateral swap lines
[USD bn]
increase in foreign exchange trading volumes of non- 550 1,275
traditional currencies, i.e. currencies other than USD,
CNY
EUR, GBP or JPY. 500

AUD
Non-traditional currency markets have been very 450 CAD
illiquid due to high transaction costs. To swap these
currencies, FX dealers had to use traditional currencies, 400
such as the USD, as an intermediary. CHF 779
350
757
With the rise of electronic trading platforms and
automatization programs in forex markets, transaction 300
631
costs for non-traditional currencies were significantly
291
reduced, thus also reducing the dependency of using 250
other currencies, including the USD, as an in-between.
Furthermore, the growing global network of central 200 303
bank currency swap lines enabled institutional investors SEK
to access other currencies more easy. 150
NOK
NZD
100 INR 207 496
466
97 328
50

6 6 110
0 0
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2005 2010 2015 2019 2020

Asia Non-Asia

Source: BIS; IMF

6 What if the US dollar loses its status as the world's reserve currency?

During the past zero-interest rate environment, central banks turned away from
the dollar in search of secure and stable returns for their mounting assets

With central banks assets around the world mounting, DEVELOPMENT OF TOTAL CENTRAL BANK GLOBAL CENTRAL BANKS ASSET
central bank reserve managers have become more ASSETS EXCLUDING FED AND ECB 1 ALLOCATION 2
dynamic in chasing returns. [USD trn, %] [%]

When reserves exceed the level associated with reserve 100% 100%
adequacy, reserve managers come to distinguish
different reserve tranches.
20

The minimum required for reserve adequacy ("liquidity Government

tranche"), should be held in liquid, low-risk assets, 15.9 40%
bonds
+54.1%
while the remainder (the "investment tranche") can be 14.8
more actively managed, keeping returns in mind, and 15 67%
invested in less liquid assets. 12.3
12.0
11.4 Deposits with
With the Federal Reserve offering extremely low 13%
10.3 central banks
interest rates in recent years as part of its ultra-loose
10
monetary policy, reserve managers sought out new Deposits with
15%
investment targets in countries that offered at least commercial banks
some yield on safe assets.
10% Government agencies
10%
and multilaterals
Contrary to bond yields in the big four currency areas, 5 3%
5% 6% Gold
namely the US, Eurozone, Japan and UK, volatility-
3% 2% IMF Reserve position
adjusted returns in non-traditional currency markets 2%
have been more attractive in recent years. Non-traditional
14%
10% asset classes
0
2016 2017 2018 2019 2020 2021 2016 2021

1  
Data refers to the reported central bank assets of 143 central banks. Original data was reported in domestic currencies. Exchange rates were adjusted by using
Oxford Economics exchange rates.
2
The Investco Global Sovereign Asset Management Study represents the views and opinions of chief investment officers, heads of asset classes and senior portfolio
strategists at 59 central banks among others

Source: IMF; Oxford Economics; Investco

7 What if the US dollar loses its status as the world's reserve currency?

The relative decline of US exports in global trade has additionally fueled the dollar's
diminishing role as the global reserve currency

In the 1990s and before, international trade in goods SHARE IN GLOBAL TRADE MEASURED IN EXPORTS OF GOODS 1
was strongly influenced by today's industrialized [%]
countries. The US regularly competed with Germany
for the largest share in global trade. 16 China

Prior to 2000, the US frequently topped the world trade 14

14.4
rankings. Back then, over 80% of countries traded
more with the US than with China. In the interim, that 12
11.3
number plummeted as China quickly took the top spot
in 128 countries, thereby giving it strong leverage to 10
encourage trade in currencies other than the USD. 8.3
8
So far, China has made only moderate use of this lever, United States
as the use of the USD has also facilitated trade for 6
China. In the past year, however, China has stepped up
its efforts to settle trade with other countries in CNY. 4

It is reported that Saudi Arabia, for example, will accept 2

CNY for China's oil purchases in the future. In addition, 1.8
LNG deliveries from the UAE to China were recently 0
settled in CNY for the first time. 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Countries top trading partners, 2021

United States China

Export destination Import origin Export destination Import origin
1. Canada 17.5% 1. China 18.5% 1. United States 17.5% 1. European Union 11.5%
2. Mexico 15.8% 2. European Union 17.1% 2. European Union 15.4% 2. South Korea 8.0%
3. European Union 15.5% 3. Mexico 13.2% 3. Japan 4.9% 3. Japan 7.7%

1  
Share of global trade is measured as each country's exports toward "World" as a percentage of the global export value

Source: IMF; UNCTAD

8 What if the US dollar loses its status as the world's reserve currency?

The notable rise of US public debt over recent decades has diminished trust in the
creditworthiness of the US government

Current account balance US general government gross

The US is effectively running a double deficit, with a
[USD bn] debt and the holders of US debt
particularly deep trade deficit on the one hand, and a [% of GDP]
significant household deficit on the other hand. 2000 2005 2010 2015 2020 2025
0
122
In turn, the country has amassed record levels of debt,
now surpassing USD 31 trillion, of which USD 7.4 trillion -200
is owed to foreign borrowers. -380
-394
-400 -446
With mounting debt levels and the recurring spectacle Fed and
of – somewhat surreal – US budget dispute(s) regarding government accounts
-600 x2.3
the debt ceiling, foreign investors' confidence in the -690
stability of the United States is wavering, as recent
movements in credit default swaps on 5-year senior US -800
debt indicate. -817
-1,000 -926
The likelihood of default remains low, as both,
Republicans and Democrats are aware of the risk and US household deficit Foreign
53
agreed to suspended the debt ceiling – until 2025. [% of GDP]
Nevertheless, this (repeat) wrangling process as well as
all speculation does send wrong signals to global
2007

2017
2012
2002

2022
2004

2014

2024
2005

2015
2013
2003

2008
2009

2023
2010

2016

2018
2019
2020
2021
2006

2011

financial markets. Mutual funds

Depository institutions
-2.0
-2.9
-3.1

-3.5
State and local gov'ts
-4.0
-4.0

-4.0

-4.0
-4.5
-4.8

-4.8
-5.0
Pension funds
-5.7

-6.0
-6.3
Insurance companies
-7.0

-7.0
US savings bonds
-8.0
-9.7

Other
-11.0

-11.6
-13.2

2000 2022
-14.0

Source: IMF; US Department of the Treasury

9 What if the US dollar loses its status as the world's reserve currency?

The dollar's strong global role enables the US to use it as a sanctioning tool, thus
incentivizing sanctioned countries to seek out alternatives to the dollar

With the dollar as the world's reserve currency, the US COUNTRIES AND OFFICIALS SANCTIONED BY THE UNITED STATES
holds a powerful economic tool, allowing its government
to exert political influence over other countries through
economic policies and trade agreements.

The most recent countries to feel the full force of US

sanctions are Russia and Iran. Especially the financial
sanctions against Russia, which was cut from the
SWIFT banking network and whose foreign held assets
were seized, have startled large reserve-holding
countries.

Due to recent macroeconomic as well as geopolitical

developments, central banks around the globe and
especially those in emerging markets turned to gold in
2022, trying to diversify from the dollar and dollar
holdings. In 2022, central banks around the world
added a staggering 1,136 tons of gold worth about USD
70 billion to their stockpiles – more than in any other
year since 1950.

With CIPS, China offers an alternative to the SWIFT

payment system. Furthermore, China is collaborating
with the monetary authorities in Thailand, Hong Kong
and the UAE in a project called mBridge, a CBDC based
solution for real-time cross-border payments.
Broad sanctions against the country
Some or all government officials
Persons contributing to conflict & destabilization of a country
Persons undermining countries sovereignty
Government officials contributing to conflict

Source: US Department of Treasury

10 What if the US dollar loses its status as the world's reserve currency?

Though being the second largest economy's currency, the Chinese renminbi is unlikely
to pose a real challenge to the dollar's status as global reserve currency

The Chinese renminbi (CNY) falls short of important BRIEF ASSESSMENT OF THE CNY AS AN ALTERNATIVE
attributes to seriously threaten the dollar in its status FOR THE WORLD RESERVE CURRENCY
as a reserve currency.
GDP and treasury market depth, 2022 US general government gross debt and the holders of US debt
Money managers holding FX reserves aim for keeping [USD bn] [% of GDP]
their FX reserves safe and liquid, i.e. avoiding credit and
51,300
exchange rate risks and invest in liquid and deep
China
markets that guarantee a painless transaction if
United States
necessary.

The Chinese market does not offer this kind of security USD 675.4 bn
in several respects: investors are faced with a market
with only little turnover in assets, bonds that are mainly USD 5.4 bn
held by state-owned or state-controlled financial (~CNY 36.97 bn)
institutions, a low score when it comes to the
25,464
implementation of the rule of law, and are, in addition,
confronted with capital controls – all of which indicates 20,900
China United States
a certain lack of interest among Chinese leaders to 18,100
contend the dollar's reserve status.

Other large economies in the region have downsides,

too: The Japanese government bond market is >60% Rule of law1, 2021
absorbed by the Bank of Japan, and there have been
China United States
multiple consecutive days without trade in Japanese 0.0 1.4
government bonds.
Current Total debt
-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
GDP securities
outstanding

1  
The Rule of law indicator is part of the World Banks Worldwide Governance Indicators. In "Rule of Law" the World Bank includes several indicators which
measure the extent to which agents have confidence in and abide by the rules of society. These include perceptions of the incidence of crime, the effectiveness
and predictability of the judiciary, and the enforceability of contracts.

Source: BIS; IMF; SIFMA; ChinaBondConnect; World Bank

11 What if the US dollar loses its status as the world's reserve currency?

Past hopes that the euro might become an alternative to the dollar as the world's reserve
currency are not likely to materialize for several reasons

With the formation of the eurozone, many leaders in BRIEF ASSESSMENT OF THE EUR AS AN ALTERNATIVE
Europe hoped to create a global counterweight to the FOR THE WORLD RESERVE CURRENCY
dollar as the world's reserve currency. In fact, the euro
is also the second most important currency globally. Eurozone countries S&P credit rating1 Yields on 10-yr government bonds across
2022 the eurozone2 [%]
Nevertheless, in all relevant statistics, the euro is far
Prime 4.4
from being a true global alternative to the dollar – it is Greece
High grade Italy
only slightly more relevant today than the Deutsche Cyprus
Upper-medium grade 4.2
Mark was at its time. Lower-medium grade
Non-investment grade, speculative 4.0
Estonia
There are several reasons for this. First, the euro area is Latvia
Non-eurozone Croatia
a fragile monetary union compared with the US – and 3.8
not even a fiscal union. The continuous European debt Malta
3.6 Slovakia
crisis presents steady proof that a monetary union Slovenia
without a fiscal union is limited in its function. In the 3.4 Spain
absence of fiscal unity, the euro will remain vulnerable Portugal
to imbalances caused by asymmetric shocks; the wide 3.2
range of sovereign bond yields underscores this issue. Austria Belgium
3.0 Finland Luxembourg
France
In addition, the presumably only European AAA country Ireland Lithuania
2.8 Netherlands
potentially able to provide the world with safe collateral
(German Bunds) has stuck to austerity for decades. 2.6

2.4 Germany

2.2

2.0

1  
Credit ratings are clustered according to their meaning, with Prime referring to AAA, High grade = AA+ - AA-, Upper Medium Grade = A+ - A-, Lower Medium Grade
= BBB+ - BBB- and Non-investment grade, speculative = BB+ - BB-. No Eurozone countries have a rating worse than BB+ (Greece) 2 Bond yields as of May 2023,
coloring according to the countries rating

Source: Capital IQ; S&P

12 What if the US dollar loses its status as the world's reserve currency?

The void left by the waning role of the dollar as a global reserve currency will not be filled
by another single currency – but rather by several currencies

Based on previous assumptions, we do not foresee that THE BRICS COUNTRIES ARE ...AND THEY ARE RECEIVING MORE AND
another single currency will take the place of the dollar INCREASINGLY GAINING ECONOMIC MORE BACKING FROM COUNTRIES IN
but that the current USD-centric reserve currency IMPORTANCE… THE "GLOBAL SOUTH"
order evolves into a multipolar world reserve order.
Current BRICS countries
In our view, currencies of the BRICS countries – whose
rising share of global trade currently accounts for over
24 20 10
20% – are likely to gain significantly more importance, 29 Brazil Russia India China South Afrika
14 10
thus increasingly able to turn away from the dollar, and
demand transactions be handled in their own
33
currencies. New membership bids for BRICS+
27
36
Were the BRICS countries to follow this path, they 13
would have several strong levers, not only due to their 17 Syria Algeria Argentina Bahrain Bangladesh
considerable and increasing relevance in the global
economy, but also because of their high (and rising) 23
34
share of global commodity supply – as well as the Afghanistan Tunisia Venezuela United Arab Thailand
Emirates
shared interest of many other countries of the "Global
26
South" to join forces in order to form BRICS+. 21
19 Iran Sudan Uruguay Saudi Arabia Indonesia

The Euro will not be a beneficiary of this changing

environment because the EU is unlikely to cut its ties 12
Pakistan Nigeria Mexico Egypt
with the United States, and will therefore only 8
marginally detach itself from trading in USD.
Turkey Senegal Nicaragua Kazakhstan
2000 2022 2050 2000 2022 2050
Share of Share of
global GDP [%] global trade [%]1, 2
Zimbabwe Belarus

BRICS EU US RoW 1
Measured as the share in global exports 2
For the EU, only extra-EU exports are considered

Source: Oxford Economics

13 What if the US dollar loses its status as the world's reserve currency?

If the current USD-dominated environment were to evolve towards multipolarity,

today's geopolitical and economic order may change considerably

ASSUMPTIONS AND IMPACT OF THE EMERGENCE OF A MULTIPOLAR CURRENCY WORLD ON VARIOUS ASPECTS OF SELECTED
COUNTRIES/REGIONS

Role of Impact on:

the region's
currency1 Trade Interest rate environment Geopolitics

→Due to currency devaluation, exports → Due to fading demand for US treasuries, →Under a multipolar currency system,
increase, and imports decrease financing cost surge makes debt-taking it would become harder for the US to
→Therefore, US trade deficit will likely more expensive exert its power, i.e. to impose effective
US shrink → Pressure on US fiscal policy would financial/economic sanctions
increase further →This will reduce leverage on other
countries

→Negligible direct impact on the EUR FX → Rising interest rates in the US are likely →As in the US, it will also become more
rate, so that only minor currency related to put further pressure on the ECB to difficult to impose financial sanctions
effects on trade are to be expected prevent currency depreciation against the on third party countries
EU →Broader currency portfolios will have to dollar
be held for trading, increasing cost of trade → Interest rates are likely to increase

→Due to appreciation of BRICS currency, → With the US still being a large and attractive →BRICS countries (and RoW) become less
exports are getting more expensive financial benchmark, rates are also expected vulnerable to US sanctions
→This will likely push prices for commodities to increase in the RoW and BRICS →With more trade taking place in alternative
BRICS for RoW → However, due to rising demand in BRICS currencies, BRICS will likely gain more
→BRICS imports would become cheaper treasuries, the upward pressure is less influence in other developing and
pronounced emerging economies

1  
Measured in terms of the proportion of trade transactions and the associated reserve holding

Source: Roland Berger

14 What if the US dollar loses its status as the world's reserve currency?

Despite its weakening hegemony, the US dollar will persist as the global reserve currency
for decades to come – Its value and global reach remain unparalleled

SUMMARY AND OUTLOOK

Dollar evolution against other currencies

[Nominal US Dollar Index1]
→ The international relevance of the USD has been
140
declining and will likely further decrease
135 Increasingly over the past year, China has been looking for (more)
partners with whom it can conduct trade in renminbi. This is a notable
130
Emerging Markets 126.5 shift, likely to reduce the relative relevance of the USD in international
125 trade and finance.

120
114.0 → The dollar is likely to remain the words reserve
115 currency for longer
110 Ø 108.6 Even though China is increasingly opening its currency to international
trade, it currently continues to account for only a fraction of the USD's
105 relevance. Moreover, China is not expected to rush the opening of its
currency, e.g. by removing capital controls, so the USD will continue
100 Ø 99.6
to be the world's reserve currency.
95

90 → Emerging markets are working on a new reserve system

Advanced Economies Concerned about the US' dominance over the global financial system
85
and its ability to ‘weaponize' its currency, other nations have been testing
80 alternatives to lessen the dollar's hegemony. Over the past year, many
emerging markets have reduced their stock of US treasuries, buying
75 gold instead. In parallel, some central banks are already working on an
2005 2008 2011 2014 2017 2020 2023 alternative to the US-dominated correspondent banking system.

1  
A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that are advanced economies or emerging market economies
Index, Jan 2006 = 100, non seasonally adjusted

Source: Federal Reserve Bank of St. Louis; Roland Berger Institute

 PUBLISHER
Authors ROLAND BERGER GMBH
Steffen Geering Sederanger 1
+49 211 4389-2194 80538 Munich
[email protected] Germany
+49 89 9230-0
Christian Krys www.rolandberger.com
+49 211 4389-2917
[email protected]

David Born
+49 69 29924-6500
[email protected]

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