Dollar as the world's reserve currency: Challenges and prospects

Abstract

The US dollar gained the status of the world's reserve currency in the Bretton Woods system and has preserved it until the present day. Such position in international finance entails both advantages and disadvantages to the USA as the issuer of this currency, and to the rest of the world using it in trading, as store of value, and for the purpose of various financial operations and transactions. After the collapse of the Bretton Woods system, the regime of fixed FX rates was replaced by floating FX rates. Yet, regardless of this change, the dollar kept its role of the world's reserve currency. Numerous banking and currency crises following the transfer to the floating FX rates regime, along with the shifts in international capital flows, forced the developing countries and countries in transition to increase their FX reserves. In the tendency to store their value, central banks usually invest them into US Treasury securities, as liquid and reliable assets. However, due to the risk incurred by the reliance on a single national currency in the role of the world's reserve currency, there have been many proposals to reform the international monetary system. According to the current global tendencies, the most serious candidates for acquiring the status of the world's reserve currency in the future are the dollar, the euro, and the Chinese yuan.