JUANA SUMMERS, HOST:
For the past 80 years, the U.S. dollar has been the world's reserve currency. Central banks everywhere hold dollars in reserve as a way to safely store wealth. Countries, businesses and people use it to trade. And when financial markets tank, people rush toward the dollar for safety. But recently, it's looked like that might be changing. NPR's Mary Childs from the Planet Money podcast has more.
MARY CHILDS, BYLINE: In the wake of President Trump's big tariff announcements on April 2, U.S. stocks, U.S. bonds and the U.S. dollar all lost value. That's unusual. Investors seem to be fleeing the U.S., which raised the question, is the reign of the U.S. dollar ending, and if so, what could take its place? Eswar Prasad at Cornell University told me a reserve currency has to have four features to appeal to central bankers.
ESWAR PRASAD: One is liquidity, meaning that they should be able to buy and sell that asset easily and in large quantities without disrupting the market.
CHILDS: And he said, No. 2, it should be safe. It should hold value. No. 3?
PRASAD: A reserve currency issuer needs to have the trust of foreign investors.
CHILDS: Things like checks and balances, so they can feel confident the government isn't going to spend recklessly or skip out on its debt. And No. 4, ideally, its economy is growing.
PRASAD: What we are seeing right now is that every element of the institutional framework - the checks and balances, the rule of law, the independence of the central bank - all of these are being shredded by Trump. So there is a question, is the world going to say, enough - we don't trust as much in the dollar as we did before, it's time to move on.
CHILDS: I asked him if any of the other major currencies could meet the criteria. The U.K.'s pound sterling - nope. Sluggish economic growth. Japan, same issue. Australia, Canada, South Korea, India, their markets are all too small. I asked about the euro - 20 countries under one common currency. Surely it's big enough.
PRASAD: To put it mildly, it's a mess.
CHILDS: Because all those countries have their own budgets and policies. The market is fragmented, and the market for just the safest ones is too small. Lastly, the other obvious candidate, the world's other biggest economy, China.
PRASAD: People are worried about the state of the Chinese economy, and they don't necessarily trust the Chinese government.
CHILDS: Central bankers and foreign investors worry China will change its rules and they won't be able to get their money out, despite China's promises. I also asked about gold and bitcoin. Those markets are also too small, and bitcoin too volatile for central banks to buy and hold in reserve. I asked him if he thought central bankers could find a replacement for the U.S. dollar.
PRASAD: They would love to. The difficulty is that there really is no other place to turn.
CHILDS: So he thinks the dollar will remain dominant, but less so. In fact, the dollar's already in decline. The percentage of reserve currencies held by central banks in dollars has been drifting lower and lower. It peaked at 73% in 2001. It is now 58%. Economists expect that to continue. The Trump administration's policies just accelerated it.
Mary Childs, NPR News.
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