All commodities and near-commodities are priced internationally in dollars, and the dollar is used for over 80% of cross-border trade settlements. Consequently the dollar is the base currency for all countries’ foreign reserves, giving it its reserve status.
However, there are now challenges to the dollar’s hegemony, with Russia, China as well as the other members, dialog-partners and associates of the Shanghai Cooperation Organisation (SCO), taking deliberate steps towards doing away with the dollar entirely for pan-Asian trade.
Recent developments setting up a rival to the IMF by the BRICS nations is part of this challenge.
If you follow the geopolitics, you might reasonably conclude that the dollar’s dominance has peaked and is now declining.
The SCO appears to believe there can be a transition away from the dollar, an idea that could turn out to be dangerously wrong at a time of great but generally unrecognised currency fragility.
At the heart of the issue there is a worrying lack of distinction between the dollar’s reserve function and its function as the monetary standard from when it replaced gold in 1971.
To fully appreciate the importance of the dollar as the standard for all other currencies, we must review the monetary history behind how and why the dollar replaced gold, and the implications for today.