The “dollar doomsayers” are making headlines once again. After the greenback’s worst start to a year since 1973, some are declaring this the beginning of the end for America’s currency. Although the dollar has experienced a significant sell-off due to Trump’s unprecedented tariffs and investors are exploring alternative currencies to preserve their wealth, it remains by far the strongest reserve currency.

The dollar’s history is full of ups and downs. In 1973, the Bretton-Woods system collapsed and exchange rates between the world’s major currencies were no longer fixed, but allowed to float. The US abandoned its pledge to maintain fixed rates and convert dollar reserves into gold, upending a system that had stabilised much of the global economy since 1944. One of the main features of the Bretton-Woods Agreement was that the dollar was pegged to gold at a rate of $35 per ounce. Other central banks could trade their dollar holdings for gold at this rate. Essentially, this made the dollar as valuable as gold.

All other currencies maintained fixed exchange rates relative to the dollar and by 1971 the American currency was significantly overvalued. This resulted in cheap imports and costly exports, leading to a trade deficit for the first time since the 19th century. All of a sudden, the US had to consider the possibility of losing its competitive edge.

All of this should sound familiar: losing manufacturing, becoming the world’s major importer, and a negative trade balance are as much on Trump’s mind as they were on Nixon’s. In the early 1970s, the US dollar accounted for over 80% of global reserves. It then declined to below 50% by the early 1990s, before rising again to over 70% in 2000, which marked its most recent peak. Today it is at 58%.

Pessimists might claim that it will only go downhill from here. But what would replace the dollar? The US currency is far from perfect, but to remain the global reserve currency it does not need to be perfect, just better than the available alternatives. Despite claims from European Central Bank chief Christine Lagarde, the euro will not replace the dollar anytime soon.

The Ukraine war, ballooning welfare states, failing industry, potential energy crises — it all means that Europe’s economy has significant problems that investors are right to worry about. The US — for all its troubles — is the world’s largest energy producer and is strong in all the areas that will matter for the future, especially artificial intelligence and robotics. Europe is simply not competitive, and a declining economy will not be the provider of the world’s reserve currency. As for the Chinese yuan, Beijing would have to give up its policy of capital controls, which is highly unlikely. Finally, the oft-mooted Brics currency has just been dealt a heavy blow by India, with New Delhi rejecting the entire concept and backing the dollar instead.

All of this indicates that even a weaker dollar is not necessarily a threat to its dominance. On the contrary, a temporary weakening could boost exports as it becomes cheaper for the world to buy American goods. It may support Trump’s desire to reshore manufacturing, creating the conditions for more competitiveness in the future. Ultimately, the dollar may yet retain its strength despite the current claims of its demise.

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Ralph Schoellhammer is assistant professor of International Relations at Webster University, Vienna.

Raphfel

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