The Dollar’s Leading Rivals All Have Their Own Drawbacks

The dollar’s rise to become the dominant currency started after World War I, but it was only definitively confirmed by the Bretton Woods accord reached in 1944. President Trump has accelerated America’s turn away from some of the post-World War II global architecture that reinforced the U.S. currency’s place at the heart of international systems. His tendency to pursue a unilateral approach could reduce the dollar’s appeal. When previous leaders moved to weaken the dollar, they did so as part of a consensus shift aimed at redressing global imbalances—most notably with the 1985 Plaza Accord.

Last year, global reserve managers cut their U.S. currency holdings as a percentage of their total stockpiles close to the lowest level since the 1990s, International Monetary Fund data show. That may have helped fuel the rush into dollars that occurred as the coronavirus pandemic spread in March, so the next IMF release could reveal a rebound in dollar holdings. But the severity of that dash into the U.S. currency helped drive up volatility in currencies such as the Australian dollar, Korean won, and Mexican peso when the Federal Reserve waited four days after taking emergency liquidity actions on March 15 to extend swap lines to those nations.