USD can remain a major reserve currency and go down in value but it can't remain the "global" reserve currency and go down in value to any significant degree. That would cause a collapse of the system similar to what happened to the Pound after Bretton Woods was ended by Nixon.
EUR is major reserve currency. Its exchange rate fluctuates because it has no global demand floor that USD has. USD is the floor. Between 1975 and 2000 both German Mark and Japanese Yen were major reserve currencies and their exchange rate fluctuated for lack of global demand floor but they always had USD as reference. What will USD use as reference? What is USD worth? In 1971 it used the oil to anchor itself.
USD has global demand floor because of energy markets which are located in the US and price trades in USD. The markets are in the US for historical reasons - the US was world's largest oil producer until 1970s.
The use of Israel as an indirect threat in the region in early 1970s was crucial to establishing of the "petrodollar". This is why the US consistently backs Israel when it largely ignored it before 1973. While other threats like Iraq or Iran are transient Israel was always going to be a problem. It also reduces British and French influence in the region as these two countries are responsible for its creation and support (incl. nukes) post-1948 respectively.
The "oil shock" of the 1970s was really the dollar shock because as you can see from the clip the production of oil did not fall in the 1970s. The shock was caused by price readjustment following the floating of the dollar once it was cut from gold. That price shock occurred during Yom Kippur war when it was most convenient to do so.
The US refused to take the smart road in the 1970s because it refused to accept a drop of standards of living after 26 years of Bretton Woods. Then it refused to take the smart road in the 1990s because it refused not to exploit an unique advantage. There's no learning experience in the past. Institutionally and culturally they don't know any other way. The American Way.
And so:
Under BW USD and GBP could used as reserve. In 1965 they held 73% and 26% of reserves respectively. By 1970 that changed to 84% and 11%. After 1971 GBP plummeted to 2,0-3,5% levels. Germany and Japan became new anchors with 20% and 9,5% reserves in 1990 while USD was at 47%. Which is why Germany and Japan paid for Desert Storm along with Gulf states.
With Gulf under control US manages to shore up USD demand to Japan, Korea and China and gets it to 70% by 2000 and 65% before the 2008 crisis. Almost BW levels of reserves. War on Terror was necessary to keep pushing USD. It was a covert way to put a gun to world's gas station like once Israel used to be.
USD has a de facto monopoly on energy trades and until that is challenged it will not drop below certain value. Everyone will inflate so as not to strangle their economies which is what happened to the EU. And conversely as long as USD is above certain value level and has certain stability it will be used for energy trades and the system will limp on until it dies.
What can prevent other countries from establishing exchanges in their own currency? Only threat to security - direct or indirect. But if China protects the Gulf to facilitate RMB deals it will only be a question of time before other actors will want to settle their trade in other currency.
So it is up to China to set the tone for what type of financial settlement the "multi-polar world" will have.
Presently the deals are for RMB-denominated trades that will lead to perhaps a RMB-denominated energy exchange but that's so there's force backing it while market is in infancy. In the long run a basket of currencies is preferable even for purely economic reasons. It will help to anchor RMB value at competitive levels vs other currencies which will not strangle exports too much while allowing for further convergence of internal markets. This was the flaw of US strategy of assuming nobody will ever challenge them after 1991.
De-dollarization is underway by tiny steps. In 2021 reserves in USD were at 58,8% while other currencies hold and RMB is increasing - from 1,08% in 2016 to 2,79% in 2021. Source for the above data:
All reserves are decreasing in absolute terms with some relative rate changes.
With oil and gas traded in RMB the share should over time come up to 20% as vulnerable countries hedge their bets against the US both in terms of payments and loss of value. And that will come primarily from USD share bringing it down to 40-45% or so. Or more. That process will cause lower relative demand for USD which will bring value down and increase inflationary pressure that will be addressed by more inflation etc. etc.
There's really no point of stability for the US because it's lived beyond its means for five decades. Every country with a free-floating currency is accustomed to the risks. The US always had the world cushion. It doesn't know what it's natural floor is. It doesn't know what it means to live near it.
They have no export economy to benefit from lower value. They are an import economy and energy production can only benefit if they choose to set up an industry which will take time. But third-world countries have lower labour cost and US no longer enjoys technological advantage as in the early 1900s. And all the markets are constantly being contested by everyone else who had to produce something while US produced dollars.
And this is why the notion of "global reserve currency at lower value" is not viable. It has no means to offset its fall. It's already past that point. It can pretend but it's just different valocity of free-fall.
Falling on its own was possible in the past when US had lower debt, higher productivity, lower trade deficits and managed to get a budget surplus. That was also when Yen was sky-high and Japan was about to buy out the US. Those times went away in the 1990s when US made its decision to push on with Reaganomics even harder and aggressively force global USD demand. Democrats' shift to the right was the key factor. They are no longer capable of correcting the course, just holding it while Republicans have the ability to push it ever rightward.
Now it's been close to a quarter century of constant deficit spending and creeping inflation - and all that despite the opening of new markets for (plundered) data a.k.a. "the new oil" that are located in the US and denominated in USD. Most of that going to the top. Americans have more disposable income but lower security than Europeans for example. But the higher disposable income is only thanks to nominal exchange rate.
Think about this - salaries in France in 2017, after taxes in full-time equivalent. I chose France because it has relatively low earnings for a rich western European country. Germany, Netherlands, Nordics etc they all have higher income.
Let's take the median (50%) and double it for households which in the US in 2015-16 earned ~$66k nationwide. Before taxes. France has EUR44k which at 1EUR=1,25USD gives $55k and at 1EUR=1,35USD gives $66k. Currently people at lower % in the table are angry because 1EUR=1,10USD and France is a service economy. US median needs to subtract all taxes, often medical and other expenses. Cost of living is cheaper but a lot depends on interest rates and exchange rates that allow to finance consumption. Those go up and all those people below median earnings are going to be hurting a lot.
Now lose your job in the US and you often lose everything. Lose your job in France and state cushions you to some extent. You will hurt in France, often badly. You will face death in America unless you have saved wealth. And I hope you know the statistics on that.
And that is a factor that I constantly need to bring up. USD losing value is not about some numbers. That's banker talk. We need people talk. For the average American cheaper dollar is about losing ability to put food on the table, keep a roof over the head and take care of a sick family member.
Those are the conditions for some funny-looking guys in uniform marching and making funny-looking hand gestures.
I would love for that article to be right. It just isn't.
Unless someone steps in to save the dollar before it crashes and Washington understands what it means - which they should since they did that to the Pound once - we are for a very rough ride. Britain had no choice. It already was fighting for survival because Germany was in a similar position and got rabid. America thinks it has a choice. And that is a very very dangerous idea.
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