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The U.S. dollar’s demise: Old song, new music

May 24, 2023
clock 6 MIN READ

There’s been a good deal of digital ink spilled in recent weeks over the pending demise of the U.S dollar (USD). It makes for catchy headlines, but the underlying realities are complicated and likely to play out over a much longer period than the internet age can tolerate. As Bloomberg’s John Authers recently put it, “Any discussion along these lines swiftly gets into deep waters.” While SEI would not be surprised to see the dollar weaken in the near-to-intermediate term, the “dollar demise” thesis has more of a longterm, structural character. 

A long and winding road

The dollar has been central to global trade, global finance and global monetary reserves since shortly after World War II, although the process started earlier in the 20th century. During World War I, the U.S. had become the largest national economy and a critically important creditor for Allied governments. Not long after, New York City supplanted London as the global economy’s financial center.1 Following World War II, much of the global economy transitioned to a monetary system of fixed exchange rates. The U.S. dollar (USD) was at its center, with the dollar convertible to gold at $35 per ounce.2 The system began to struggle in the late 1960s, as domestic spending priorities in the U.S. started to run ahead of what existing gold reserves were able to support. In 1971, the system essentially came to an end when President Nixon suspended gold convertibility. In 1973, it formally came to an end as six European countries created a currency bloc with a floating exchange rate against the USD. It took some time (see 1985’s Plaza Accord and 1987’s Louvre Accord), but the world eventually adjusted to the prevailing system of floating exchange rates and
currencies that are not convertible into one or more precious metals. 

Despite these and other major upheavals (such as the global financial crisis), the central importance of the USD has persisted, supported by a large and dynamic U.S. economy, a relatively stable political system and trustworthy legal institutions. Many analysts would throw American military might (an outgrowth of the post-WWII Cold War between the U.S. and U.S.S.R.) into the equation as well. Whatever the reasons, it’s undeniable that the USD remains the central currency in terms of international trade, global financial transactions and foreign exchange reserves.

1 Stephen Fidler, “Rise of the U.S.,” Wall Street Journal
2 Known as the Bretton Woods system (as it was agreed to at a 1944 international conference held at the Mt. Washington Hotel in
Bretton Woods, New Hampshire), it also resulted in the creation of the International Monetary Fund and the World Bank.

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