On the 22nd of May 2010, a young man named Laszlo bought two large pizzas for the eye-watering sum of 10,000 BTC. It is quite fitting then that fifteen years later to the day, Bitcoin broke a new record by reaching $112,000 per coin. For those keeping track, those pizzas are worth over a billion Dollars by today’s prices. The stars are starting to align for cryptocurrencies, firstly in terms of regulations, secondly in terms of capital flows. Genuine work is being done to bring clarity to crypto, most recently with a bill in the US Senate, which aims to build proper legal frameworks for stablecoins. As Bitcoin surges upwards into uncharted prices, the crypto industry at large enters a new era of financial legitimacy.

Back in the real world, manufacturing and services PMIs published on Thursday provided the latest look into global growth. European figures uncovered contraction across the board, with some bad misses particularly in the service sector. Japanese figures largely fell in line with predictions, showing a shrinking manufacturing industry. In the US meanwhile, the latest numbers came in higher than expected at 52.3, indicating accelerated expansion in both sectors.

The economic calendar has had very little to offer so far this week and this will not change later today. Currencies have been stable over the last couple of days and nothing seems to have caught the imagination of traders this morning either. The passage of a new tax bill through the House of Representatives prompted a selloff in US stocks on Wednesday but the move did not retain any momentum during the following session. All in all a relatively calm week so far.

A pretty mundane start to the week so far. The Dollar Currency Index is currently aiming for its third consecutive daily close in the red and has fallen below 100 as of this morning. A number of elements are weighing on the Greenback, among them the downgrade of the United States’ credit rating from AAA to AA1 by Moody’s last Friday. The change in score has had limited impact, but adds to the narrative of reduced confidence in the US to service its debt. The other two major credit rating agencies, Fitch Group and S&P Global Ratings, lowered their scores in 2023 and 2011 respectively. The latest change by Moody’s puts all three agencies on the same page. A weaker Dollar has helped precious metals over the last couple of days, pushing gold back over $3,300.

Several Fed board members have spoken this week, unanimously voicing their concerns about the outlook of the US economy and labour market. While nothing new, the comments will do nothing to instil confidence in the mind of the average investor during these uncertain times. Little of substance has materialised on the trade front over the last few days, although attentions are understandably directed towards the G7 meeting currently taking place in Canada. Restoring global stability and growth is one of the main focuses of the gathering, although Ukraine and sanctions against Russia also occupy much of the agenda.

In crypto meanwhile, a bill relating to the GENIUS act passed the US Senate as expected on Monday, paving the way for a genuine regulatory framework for stablecoins. Stablecoins have experienced staggering growth since their inception in 2014 and now account for around $250 billion in market cap. Despite this, there has been very little progress on the regulation front up until now – a criticism valid for cryptocurrencies in general. Greater optimism in the fledgling industry has pushed Bitcoin up to $107k this week.

Stock markets around the world saw strong rallies once again last week as trade tensions continued to thaw. The pause on tariffs between the US and China has certainly done a lot to smooth things over with investors, while lower than expected inflation figures have also done their bit. The Dow Jones rose another 3.4% last week, while the S&P 500 climbed 5.3% and the Nasdaq Composite soared to a 7.1% weekly close. The former two indices are now in the green in 2025. Interestingly, the Magnificent Seven have actually weighed down the S&P 500 so far this year, leaving the remaining 493 companies to drag the index into positive territory.

As impressive as the rally in precious metals has been thus far, gold has come off the boil in recent weeks and is barely hanging on to $3,200 at the time of writing. Bitcoin on the other hand appeared to soak up some of the outflows, allowing prices to rise above $106k late last night. The move seems to have already lost steam however, with Bitcoin dropping back down to $103k early this morning. Nevertheless, Bitcoin remains poised just under its record peak while Bitcoin dominance remains near historic highs. In the latest legal milestone, the US congress will debate a bill relating to the issuance of stablecoins later today, further entrenching cryptocurrencies within the American financial framework. The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, failed a previous attempt to pass the senate earlier in the month but is now expected to do so following a number of amendments.

Very little on the economic calendar this coming week. The Reserve Bank of Australia is expected to lower rates on the Aussie Dollar tomorrow by another 25-bps to 3.85%. On Thursday meanwhile, S&P Global will release a number of manufacturing and services PMI figures for various parts of the world, providing the latest clues as to which way the wind is blowing with regards to global demand. A number of Fed board members will take to the stage over the coming days, although by and large they are expected to deliver much of the same message as their Chairman Jerome Powell. In the absence more substantive economic data, attentions will likely turn back to developments on the tariff front.

The latest batch of US PPI data hit the newswires yesterday. Following in the footsteps of CPI figures a couple of days prior, the report also pointed to lower inflation across the board, surprising markets with a 0.5% drop in the PPI as opposed to an expected 0.2% increase. The implication is that producer prices actually fell in April compared to the previous month, once again challenging the Fed’s narrative of high inflation risks. Despite this, FedWatch has yet to budge an inch, still overwhelmingly predicting a rate hold at the next meeting in June. In other economic news, US retail sales came in higher than expected on Thursday, while jobless claims largely fell in line with predictions.

There is a subtle but noticeable shift among the doomsayers who have been predicting economic carnage for the US and indeed the world at large. More recently, such voices have reconsidered their stance and have adjusted growth forecasts to the upside. Among them, Barclays are now no longer predicting a recession for the US economy in the latter half of the year. Over at Blackrock, a senior member stated that the shift was “a clear appreciation by the market that some of the worst fears were maybe overly priced into the market”. Of course, the newfound confidence rests heavily on the establishment of new trade deals between the US and its trading partners, which will take many months to fully set in stone.

Given the lack of momentum in markets over the last couple of days, it seems that many traders have already packed it in for the week. The only exception is gold, which closed 2% higher yesterday but not before sweeping the lows of $3,120 an ounce in an apparent hunt for stop-losses. While the softening trade situation will do nothing to promote the case for gold, the prospect of lower interest rates on the Dollar potentially will.

The recent uproar surrounding tariffs has spilled over to the more encompassing question of the Dollar itself. Many voices are now asking whether the mighty Dollar will forgo its status as the world’s reserve currency, and what such an unwinding would entail. Before even attempting an answer, it is crucial to understand how the Dollar came to occupy such a position to begin with.

World reserve currency

First of all, what does the phrase “world reserve currency” actually mean? Simply put, it means that almost every nation around the world holds US Dollars as part of their strategic currency reserves. Every country essentially has a balance sheet with varying amounts of money denominated in different currencies. The Greenback is by far the most popular currency and makes up around 60% of all international reserves. The Euro is a distant second at 20%, and the Japanese Yen and Pound Sterling are further behind still. Countries from China to France to Brazil all hold large amounts of US Dollars.

So why is the Dollar so popular? Firstly, because Dollars are essential for international trade. Even between countries not trading with the USA, the Dollar remains more appealing due to its usefulness. Imagine a scenario in which Japan wanted to sell goods to India. Would Japan rather be paid in USD or in Rupees? Rupees are all well and good, but where else can they be spent other than in India? On the other hand, those same Dollars could be used to pay for goods coming from anywhere on Earth.

The other reason is that the USD is viewed as a very stable currency. Not necessarily in the sense that exchange rates are not volatile, but in the sense that Dollars are backed up by a very robust bond market, can be accessed at any time via reliable banking infrastructure and are extremely liquid. For this reason, Dollars also make up the vast majority of foreign exchange trading volumes.

Background

But of all the currencies in the world, why the Dollar? How did the mantle fall to the Greenback as opposed to another currency such as the Pound or Euro or RMB? To answer this, we need to go all the way back to 1944 and the Bretton Woods agreement. It is imperative to understand the backdrop against which this agreement came into being. The Second World War was drawing to a close and much of the world lay in ruins. Countries needed to rebuild, but crucially they needed to do so in such a way as to not repeat the same mistakes that sparked the conflict in the first place. A new, international financial structure was needed. One that would allow countries from around the world to grow in unison while minimising monetary warfare.

To achieve this, the Bretton Woods agreement set in stone two key points:

• One ounce of gold would be fixed to 35 United States Dollars

• • Each signing member would guarantee the conversion of their currency to the USD according to strict currency pegs

The purpose of the convertibility to gold was to ensure a stable currency that could not be printed out of thin air, inflating away its value. The idea behind the currency pegs was to stop countries from engaging in competitive devaluation, which would give a short-term advantage to their export market by making their products cheaper abroad. Historically, the problem with countries weaponising their currency in this way is that every other country ends up doing the same thing, thereby resulting in an endless race to the bottom.

There were several reasons why the Dollar was chosen as opposed to another currency. The first was simply that the US had more gold than anyone else did. In fact, it had roughly half of the worldwide gold supply of the time. The second was that compared to other signatory nations, the US emerged from the second world war relatively unscathed, with a strong industrial base and fully intact infrastructure. The US was in a much stronger position than anyone else. The only real competitor of the time was of course the Soviet Union, which never ratified the agreement for obvious reasons.

A sometimes-overlooked element of the agreement was the military aspect of it. In exchange for using the Dollar, many countries would agree to host American military bases, allowing the US to project power around the globe and contain the USSR. As part of this arrangement, the US government promised to protect international shipping lanes. In this day and age, it is easy to take such a thing for granted, but the fact is that being able to ship cargo safely around the world is by no means the natural state of affairs. For centuries, such ventures have only been possible thanks to huge navy powers overseeing the busiest parts of our oceans. Major shipping passages such as the Suez and Panama Canals, the Malacca and Singapore Straits, among many others, all require a strong military presence, which has been provided by the US navy for the better part of a century. Without it, piracy would reign supreme.

Problems

And so the Dollar became the reserve currency of the world. For a while, the system worked as intended, however it would not take long for problems to develop. The major issue is that the Dollar was simply too attractive. Everyone wanted Dollars. They were useful, stable, secure, and most importantly could be traded in for gold. This increased the demand for Dollars on the world stage, which forced the US to print more and more of them to keep up. Unfortunately, printing Dollars is a lot easier than maintaining the proper gold reserves to back them up, which is eventually what broke the system.

By the early 1970s, the amount of Dollars in circulation dwarfed US gold supplies by about 4 to 1, making the $35 conversion completely detached from reality. It meant that the Dollar was in fact extremely overvalued compared to what it would otherwise be worth, leading to fears of a run on the Dollar and also causing US gold reserves to rapidly diminish. It got to the point where European navies were being sent across the Atlantic to repatriate their national gold supplies and eventually culminated in the so-called Nixon shock, whereby the gold peg was abandoned and the Dollar turned into a floating fiat currency.

Bretton Woods was essentially over, but the Dollar retained its status for a variety of reasons. To put it bluntly, no other nation was capable of guaranteeing a global currency but the US. The Greenback was still by far the most liquid money on Earth, it was still backed up by the largest treasuries market, and was still the backbone of international trade, which still relied heavily on the US navy. By this time, much of the world had recovered from the devastation of the Second World War and could finally shift their economies from reconstruction to expansion. The US welcomed the new capital with open arms.

Had the problem been solved? Not in the slightest. Once the currency pegs had been dismissed, there was nothing to stop speculators from appreciating the value of the Dollar. Many countries engaged in currency manipulation in order to make their exports more attractive, with devastating consequences to US industry. Between 1980 and 1985, the Dollar appreciated by around 50% against other major currencies, eventually forcing the US to implement the Plaza Accords, which would devalue the Dollar significantly.

More generally, the issue is that the Dollar’s problems are inherent to its status as world reserve currency. Due to its very nature, there is always a growing demand for Dollars, which the US therefore needs to supply. At this point it is necessary to talk about the actual structural advantages and disadvantages of being the world’s primary reserve currency, because such questions are just as valid today as they were back then.

Advantages:

Control. As the sole provider and guarantor of the international currency, the US can dictate who can and who cannot participate in the global monetary system. International Dollar transactions are typically sent via corresponding banks in the US, or at the very least use some form of US based infrastructure to settle. In effect, this tethers all USD transactions to the United States, which makes them subject to American laws and regulations. This allows the US government to sanction countries, restricting their access to global banking networks and limiting their ability to conduct international trade. This has been used time and time again against the likes of Iran or Venezuela or Cuba or example. The problem with using this tool too liberally is that targeted countries typically move towards weaning themselves off the Greenback and in extreme cases reducing their dependence on international trade altogether, making such countries more resilient to potential future sanctions, thereby reducing the Dollar’s power.

Asset prices. Dollars are held all around the world, which intentionally or not creates demand for secure, reliable, Dollar-denominated investments, such as US treasury bonds or the US stock market. This translates to capital flows towards US assets, causing the American capital account to increase greatly.

Low borrowing costs. Closely tied to the above, the constant demand for US treasuries also helps with government funding and allows the bond market to remain liquid and healthy. High demand for US government debt means that US bonds do not need to advertise high interest rates in order to be attractive, providing the US with cheap financing options. This argument is mostly a historical one, as many currencies now offer lower interest rates than those on the Dollar, such as the Euro or Yen for example, despite having far less demand for their respective bond markets.

Imports. Countries outside of the United States typically have to pay for foreign goods with a currency that is not their own. This forces such nations to maintain sufficient foreign reserves in order to participate in international trade. A country with a trade deficit may find itself spending more Dollars than it earns, which unless properly accounted for can lead to a balance of payments crisis, meaning it can no longer pay for imports. The United States is in a unique situation in this regard because it pays for foreign goods with its own currency, meaning it can maintain much larger trade deficits.

Disadvantages:

Wealth disparity. The problem with inflating the Dollar or indeed Dollar-denominated assets is that it disproportionately benefits those already in possession of such. US institutions with sizeable stock portfolios are obviously all too happy for their investments to be the object of desire from investors around the world. However, for those living from pay cheque to pay cheque, an exuberant stock market means very little.

Trade deficit. Developing the point made in the previous section, it is not so much that the US can maintain a large trade deficit, but more that it has to maintain a large trade deficit. As the world reserve currency, Dollars are required for international trade, creating permanent demand for the Greenback. This implies that the US continuously has to supply the globe with Dollars. To satisfy this demand, the US is essentially saddled with a permanent trade deficit, taking in goods from around the world in exchange for supplying it with Dollars. This situation is known as the Triffin dilemma and has been well understood for decades. Many parts of the world have based their entire economic model on maintaining a trade surplus, allowing them to flourish. However, much of this surplus has to be soaked up by the United States in order for their economies to keep growing.

Currency manipulation. Intimately tied to the above point is the question of currency debasement. It is in the interest of export-based nations to keep their currencies at artificially low levels in order to make their exports more attractive internationally. Many parts of the world have long been accused of such tactics, particularly Japan and China, to the detriment of the United States.

Local manufacturing. The above situation has had devastating consequences for American manufacturing and by extension American jobs. A stronger Dollar makes US exports more expensive and therefore less competitive on the world stage. Moreover, demand abroad remains weak because many nations have geared their economies in favour of their export markets. Domestic demand remains low in such countries, which makes them poor trading partners. The US government can combat this to a certain extent via private consumer financing and various stimulus packages, but such measures are costly and typically result in accumulating more debt.

The exorbitant Dollar

To summarise in very broad strokes, maintaining the world’s reserve currency is good for the US capital account, but bad for the US trade account, resulting in a huge surplus in the former and a huge deficit in the latter. Some of the main benefits are in fact not economic ones but geopolitical ones. To the obvious question then: is it worth it? Some critics claim that the US can consume far beyond its means because of the current status quo, while others make the argument that the US is in fact forced to do so. Due to the interconnectedness of the global economy, there is a zero-sum game element at play. Where there is a trade surplus, there must be a trade deficit. As it stands, the world sells and the US buys. Many parts of the world have benefitted immensely from this paradigm.

The position of the United States was once described as being one of “exorbitant privilege” by Valéry Giscard d'Estaing, the French minister of finance. This may have been true back in the 1960s when the term was first coined, but it has become increasingly difficult to defend today. Some economists have even described the US as being saddled with an “exorbitant burden” instead.

The future

The modern Dollar system has unquestionably helped the world to flourish, including the US itself, but as in 1971, 1985 and even 2008, the cracks are beginning to show. Should the Dollar relinquish its position, it is by no means a given that the US would suffer the most. The consequences for the US would no doubt be profound, but the consequences for those nations dependent on exports to America would be no less so. The buyer stops buying and the seller stops selling. Which party is the hardest hit?

The point is moot, because it is extremely unlikely that the Dollar will lose its status as the world reserve currency any time soon. No other nation comes even close to having the financial gravitas, structural flexibility or openness required to take up the mantle. China, the world’s second largest economy, does not permit free capital flows in or out of the country. The RMB faces a lack of convertibility options, opaque banking operations and currently only makes up around 2% of all foreign currency reserves.

The Euro could be a possibility, after all it accounts for roughly 20% off all foreign reserves. Unfortunately, the Euro has very little liquidity outside of Europe and North America, access to European bonds is still somewhat restricted, the infrastructure backing up the Euro is nowhere near as expansive as that backing up the Dollar and the European Central Bank does not seem to have a plan to address any of these points. Put simply, the world does not transact in the Euro the same way it does with the Dollar. Before the USD became the de facto world currency, the Greenback was already a staple of international trade and had been for decades. The Euro cannot claim the same.

For all the talk of a common BRICS currency, little of substance has emerged as of yet. A return to a gold standard seems equally unfeasible because it would entail either a worldwide currency or strict conversion pegs, which in turn limits the monetary sovereignty of the countries involved. One cannot have free capital flows, fixed exchange rates and fiscal autonomy. A cryptographic solution based on proof of reserves is certainly possible, but would likely take years to implement and would no doubt require a period of transition that would inevitably include the Dollar anyway.

For all the arguments for or against a new monetary system, the fact is that no one is stepping forward to take on the role that the US currently occupies. The world has never had a genuine international currency before. Throughout history, there have been currencies that extended far beyond their home borders, such as Roman Denarii, Spanish silver Dollars or the Pound Sterling, but these were nowhere near as central to the world economy as the US Dollar is today. These are unchartered waters.

One potential outcome is simply a reiteration of the current structure but with some much-needed adjustments. Bretton Woods was not perfect, nor were Nixon’s attempts to fix it. Many modifications have been made since the original 1944 meeting, with varying degrees of success. A number of economists have floated the idea of a hypothetical Mar-a-Lago accord, in reference to Donald Trump’s Florida residence. Such an agreement may bring back currency pegs, include permanently higher trade tariffs, or perhaps even institute some form of participation fee for using the Dollar. Economists have been debating such matters for decades. There are no easy answers. All that can be said for sure is that the Dollar will retain its place for a while longer.

Financial markets surged early this week in light of easing trade tensions between the US and China. Following initial talks over the weekend, the two blocks agreed to a temporary ceasefire, with both countries committing to a 90-day reprieve during which tariffs would be greatly reduced. Chinese goods imported into America will face tariffs of just 30% as of today, compared to 145% before the agreement. On the other side of the deal, tariffs on US imports into China will fall from 125% down to just 10%. It will obviously take many months and even years to fully restructure such international trade deals, but for the time being stock markets are content.

The good news continued on Tuesday with the release of the latest round of CPI data. For all the fearmongering, US inflation once again dipped below expectations in April. Prices rose 2.3% YoY – the lowest increase in four years – while core inflation fell in line with predictions at 2.8%. The latest report is significant in that in encompasses the impact of the liberation day tariff regime, which came into effect on the 2nd of April.

The progress made on the tariff front has not lent itself to safe-haven assets, particularly precious metals. Gold fell precipitously on Monday, losing the better part of $100 per ounce and making very little effort to resist the descent. The meteoric rise in gold this year has been in no small part because of the uncertainty surrounding global trade. Should such fears continue to dissipate, it may become harder to defend the huge gains observed so far this year.

The crypto sphere enjoyed a number of small developments over the last couple of days. The first is the inclusion of Coinbase (COIN) in the S&P 500, the first and only crypto exchange in the index. It is worth remembering that the company has endured aggressive scrutiny from the SEC in recent years, facing intense legal pressure and hostile regulatory measures. While the exchange was already listed on the NASDAQ, its inclusion in the S&P 500 is indicative of a softening of opinion towards crypto in general. The company’s stock shot up 24% following yesterday’s announcement. In other news, US-based financial services company Robinhood announced on Tuesday that it will acquire Canadian crypto firm WonderFi for C$250 million. The acquisition is merely the latest step in Robinhood’s growth, which includes the purchase of crypto exchange Bitstamp last year. Meanwhile, this morning Standard Chartered said that it has formed a strategic partnership with crypto broker FalconX. The above cases barely scratch the surface of the ongoing strengthening of ties between traditional finance and crypto markets. Much more to come.