Can The U.S. Have It Both Ways? The Risks Of A Weaker Dollar With Reserve Currency Status

The U.S. dollar has long held a unique position in global finance, serving as the world’s dominant reserve currency. However, recent policy shifts indicate that the U.S. government is actively pursuing a weaker dollar while still aiming to maintain its so-called "exorbitant privilege"—the ability to borrow cheaply and influence global markets with minimal repercussions.

This strategy presents a fundamental contradiction. On one hand, a weaker dollar can boost U.S. exports and reduce trade imbalances. On the other, it risks undermining global confidence in the dollar’s reserve status, potentially accelerating a move toward alternative currencies and safe-haven assets like gold.

The Concept of the Exorbitant Privilege

The term "exorbitant privilege" refers to the benefits the U.S. enjoys due to the dollar's global reserve currency status. Since the Bretton Woods agreement in 1944, the dollar has been at the center of international trade, finance, and investment. This dominance allows the U.S. to borrow at lower interest rates, print money with limited inflationary consequences, and sustain large trade deficits without immediate economic turmoil.

Unlike other nations that must maintain strict fiscal discipline to prevent capital flight, the U.S. can finance its debt through the continuous demand for dollars by foreign central banks and investors. However, this privilege is not guaranteed—it depends on global confidence in the U.S. economy and financial system.

Why the U.S. Wants a Weaker Dollar

There are several reasons why the U.S. government and Federal Reserve may favor a weaker dollar:

1. Boosting Exports and Domestic Industry – A weaker dollar makes U.S. goods and services more competitive in global markets, potentially reducing trade deficits with key partners like China and the European Union.
2. Managing the National Debt – The U.S. carries a staggering national debt exceeding $34 trillion. A weaker dollar can erode the real value of debt over time, making it easier to service.
3. Stimulating Inflation – In a high-debt environment, moderate inflation can help reduce the real burden of liabilities while encouraging consumer spending and investment.
4. Supporting Monetary Easing – A weaker dollar aligns with the Federal Reserve’s strategy of keeping interest rates lower for longer, preventing a slowdown in economic growth.

While these benefits may help in the short term, they come with long-term risks—most notably, a decline in global confidence in the dollar.

The Risks of Undermining the Dollar’s Reserve Status

The greatest risk of a deliberate dollar devaluation is the erosion of its status as the world’s preferred reserve currency. If foreign governments, investors, and central banks begin to doubt the dollar’s stability, they may shift away from holding U.S. assets, weakening American financial power.

Some key risks include:

• Reduced Demand for U.S. Treasuries – Foreign nations, particularly China and Japan, hold large reserves of U.S. debt. If confidence in the dollar declines, these countries may reduce their holdings, increasing borrowing costs for the U.S. government.
• Shift Toward Alternative Currencies – The euro and Chinese yuan are already gaining traction as alternative reserve currencies. Digital currencies, including central bank digital currencies (CBDCs), may further weaken the dollar’s dominance.
• De-Dollarization Trends – Countries like Russia and China have actively worked to reduce their reliance on the dollar, conducting more trade in their own currencies. If this trend accelerates, the dollar's role in global trade could shrink significantly.

Gold’s Role as a Safe Haven Asset

As confidence in the dollar wavers, investors and central banks have increasingly turned to gold as a hedge against currency instability. Historically, gold has been a reliable store of value during periods of economic uncertainty, inflation, and geopolitical tension.

Key indicators of gold’s rising prominence include:

• Central Bank Purchases – Central banks, particularly in China, Russia, and emerging markets, have been aggressively increasing their gold reserves to reduce exposure to the dollar.
• Rising Gold Prices – Gold prices have surged as investors seek protection against inflation and currency volatility.
• Gold as a De-Dollarization Tool – Countries looking to reduce reliance on the U.S. financial system have begun using gold to settle trade agreements outside the dollar framework.

If the trend continues, gold could play an increasingly significant role in the global financial system, reducing the dominance of the dollar.

Global Reactions and Geopolitical Implications

The U.S. dollar’s dominance has historically been a pillar of geopolitical power, allowing Washington to impose financial sanctions, control global trade flows, and influence economic policy worldwide. However, as the U.S. intentionally weakens its currency, geopolitical rivals and allies alike are re-evaluating their reliance on the dollar.

Some key global reactions include:

• China’s Push for the Yuan – China has actively promoted the yuan in international trade, signing agreements with major economies to settle transactions in its own currency.
• BRICS Nations Seeking Alternatives – Countries in the BRICS bloc (Brazil, Russia, India, China, and South Africa) have discussed creating a new reserve currency to rival the dollar.
• Middle Eastern Oil Trade Shifts – Saudi Arabia and other oil-producing nations have explored selling oil in currencies other than the dollar, which could significantly impact the petrodollar system.

As these trends gain momentum, the U.S. may find itself struggling to maintain both a weaker dollar and its privileged financial position.

Conclusion: Can the U.S. Maintain the Balancing Act?

The U.S. government faces a delicate balancing act: weakening the dollar to support economic policy goals while ensuring it remains the world’s dominant reserve currency. The strategy carries inherent contradictions, as excessive devaluation could push foreign investors and central banks toward alternative assets like gold and rival currencies.

In the long run, the success of this approach will depend on whether the U.S. can maintain economic and geopolitical stability. If confidence in the dollar declines too rapidly, the global financial landscape could shift in ways that permanently diminish America's financial influence.

For now, gold continues to glitter as a safeguard against uncertainty, and the world watches closely to see whether the unimaginable—a serious challenge to the dollar’s supremacy—becomes reality.

Author: Ricardo Goulart