This growing trend may signal a potential rethinking of global reserve strategies and challenges to the dollar’s dominance ahead.
The historical dominance of the U.S. dollar, established through milestones like the Bretton Woods system, the petrodollar arrangement, and its reputation as a safe-haven currency, remains a significant force in global finance. Yet, the foundations that once secured its supremacy now contribute to a gradual shift as central banks increasingly diversify their reserves.
While the dollar's prominence was traditionally bolstered by the strength and stability of the U.S. financial system, growing concerns over rising national debt, chronic fiscal deficits, and political dysfunction have cast doubts on its long-term reliability.
According to the Bloomberg data (charts below), we see a significant shift in global reserves, with the U.S. dollar’s share declining from about 65% in 2009 to 58% in 2024, as central banks diversify away from the US dollar. At the same time, gold's spot price has surged, surpassing $2,500 per ounce, reflecting its rising appeal as a hedge against currency risks and geopolitical uncertainty.
This dual trend signals a move toward greater reliance on stable, tangible assets like gold, reshaping the international monetary landscape. For decades, the U.S. dollar reigned supreme as the world's primary reserve currency, bolstered by economic stability, liquidity, and trust in the U.S. government. However, recent years have introduced challenges to its preeminence.
Why is the Dollar Losing Ground?
➀ Geopolitical Fragmentation: The weaponization of the dollar through sanctions has made several countries wary of over-reliance on it. Nations like China and Russia have accelerated efforts to reduce their dollar holdings, turning instead to alternative currencies and gold to safeguard their financial systems.
➁ Inflation and Debt Concerns: Persistent inflation and an escalating U.S. national debt have raised questions about the dollar's long-term stability. The U.S. has also pursued aggressive monetary easing and fiscal policies, which, while aimed at economic recovery, have eroded the currency's perceived value.
➂ Global De-dollarization Efforts: Emerging economies and alliances such as BRICS have sought to reduce their dependence on the dollar. These nations are exploring alternatives, such as creating new trade settlement systems and holding reserves in other currencies or commodities.
Why is Gold Ascending?
➀ Safe-Haven Appeal: In times of economic or geopolitical uncertainty, gold remains a universally recognized store of value. Central banks have turned to gold as a hedge against currency volatility and systemic risks.
➁ Intrinsic Value: Unlike fiat currencies, gold’s value is not tied to the policies of any single country. This makes it an attractive option for central banks seeking to diversify away from the dollar.
➂ Demand from Emerging Economies: Countries like China, India, and Turkey have significantly increased their gold reserves, partly to bolster their currencies and mitigate risks associated with dollar dependency.
Why is the Idea of a Modern Plaza Accord Being Debated?
The Plaza Accord of 1985 was a landmark agreement among five major economies—the United States, Japan, West Germany, France, and the United Kingdom—to address the overvaluation of the U.S. dollar and the resulting trade imbalances. At the time, a strong dollar was making U.S. exports less competitive while boosting imports, which led to a growing trade deficit. The accord aimed to weaken the dollar relative to the Japanese Yen and the German Deutsche Mark by coordinating foreign exchange interventions.
The strategy succeeded in the short term, with the dollar depreciating by over 40% against these currencies within two years, helping to improve the U.S. trade balance. However, the resulting sharp appreciation of the yen contributed to an economic bubble in Japan, ultimately leading to the country's "Lost Decade."
Some on Wall Street are now speculating that President-elect Donald Trump might pursue a modern version of the Plaza Accord to address similar economic challenges. The U.S. trade deficit and an overvalued dollar are again key concerns, as a strong dollar can hinder U.S. exports while benefiting imports.
Trump's previous economic policies focused on reducing trade imbalances and boosting manufacturing competitiveness, which could be facilitated by a weaker dollar. Additionally, the declining dominance of the dollar in global reserves and shifting geopolitical dynamics, particularly involving China, make a coordinated currency management approach more relevant today.
However, a modern Plaza Accord would face significant challenges. Unlike in 1985, China is now a major global economic player, and getting it to agree to currency adjustments would be difficult. Additionally, the economic priorities of today's major economies, such as the Eurozone and Japan, are more diverse and may resist interventions that weaken their currencies.
Lastly, the risk of inflation, retaliation through tariffs, and managing potential asset bubbles, as seen in Japan's post-Plaza Accord, complicates the feasibility of such an agreement. Regardless, the U.S will need to pursue prudent economic policies, diplomatic efforts, and strategic adjustments to safeguard its global financial leadership.
Originally published at Substack.
