Why did the British Pound Sterling lose its reserve status? Why is the US Dollar world’s reserve currency? Why is the USD losing its market share? What next? Let’s explore

The British Pound was the world’s reserve currency from 1815 – 1920

1. Great Britain was the world’s largest economy in the world as it was the epicenter of innovation – the Industrial Revolution. The Royal Navy was the largest and most powerful in the world helped establish colonies around the world. The stable political and legal system set the foundation for economic growth.

2. Great Britain was heavily indebted after World War I & II, the great depression eroded Britain’s economic might. The final straw was decolonization, reducing its economic and political influence in the world.

The US Dollar has been the reserve currency from 1920 to the present day.
The United States remains the largest and most open economy in the world. The US respects and enforces the rule of law. The US financial markets are the largest, most liquid, and least controlled and the dollar is freely convertible.

1. Unlike Great Britain, the US achieved global status by conquering the mind and not the land. The peaceful mental invasion was accomplished by producing innovative products, services, and most importantly entertainment.

2. China is the world’s second-largest economy but lacks political, economic, and market transparency to pose a credible challenge.

Why is the status eroding now?

1.  USD’s share in the central bank’s FX reserve has dropped from 70% to c.55%.  The steep increase in interest rates by Fed has strengthened the USD. Emerging economies all over the world are settling trade in local currency.

2. U.S. and its allies have frozen more than $300 billion of Russia’s foreign currency reserves. To quote Ruchir Sharma “The US saw sanctions to fight Russia without risking troops. But it is paying the price in lost currency allegiances”.

3. Nations that disagree with US foreign policy risk reserves being confiscated or frozen. It is not surprising that the central bank’s gold purchases hit the highest since 1967.

What next?

1.     US cannot take its financial superpower status for granted. The next challenger is unlikely to be a sovereign currency or Gold.

2.     Predictions are hard but entertainment is guaranteed. I suspect the next reserve currency is likely to be digital currency backed by mega-Tech.

The combined market cap of Apple, Microsoft, Alphabet (Google), and Amazon is  $7 Trillion+, making it the third largest economy in the world.

3. Money and currency have always been about trust. Will the public trust business more than the government in the future? Interesting thought to end the post.

Note: Views are personal and certainly not investment advice. Join my learning journey, follow Guru Padmanabhan

You can read my writings at view all blogs.