Reserve currencies come and go, but the franc remains. Admittedly, that sounds a bit overblown, but it might not be entirely wrong. After all, the world has seen many reserve currencies \u2013 right now, it\u2019s the U.S. dollar \u2013 but the Swiss franc, as a “crisis currency,” has endured far longer. Unlike the U.S. dollar, which must prove itself daily as the global trade currency, the franc enjoys the reputation of a “safe haven” \u2013 one it retains even when it doesn\u2019t want to. It doesn\u2019t have to do anything to earn this status, while the U.S. government must constantly work to uphold the dollar\u2019s dominance as the world\u2019s reserve currency.<\/p>\n\n\n\n
The U.S. dollar\u2019s role as the world\u2019s reserve currency is no accident. Already after World War II, the U.S. worked to establish the dollar as the dominant currency. Initially, this was achieved in part by guaranteeing that dollars could always be exchanged for gold. Gold served as a stability guarantee for the dollar, giving it enormous appeal. In the 1970s, however, the gold standard \u2013 also known as the Bretton Woods system \u2013 came under pressure. The costs of the Vietnam War, among other factors, led to a ballooning U.S. current account deficit. Countries like France also demanded to exchange their dollar reserves for gold. The U.S. couldn\u2019t fulfill these obligations because it simply didn\u2019t have enough gold in its vaults. The gold standard was abandoned as a result. To keep the U.S. dollar attractive, the U.S. made major efforts to ensure that commodity trading \u2013 especially oil sales \u2013 was denominated in dollars. The American promise to militarily support oil-producing countries in the Middle East, if necessary, led to oil being traded on a large scale in dollars. This was, in a sense, a quid pro quo for military and political backing.<\/p>\n\n\n\n
This system still secures the U.S. dollar\u2019s position as the global reserve currency today. Data from the Bank for International Settlements (BIS) shows that the U.S. dollar is involved in around 90 percent of all foreign exchange transactions as one of the two currencies traded. In other words, countries don\u2019t trade their currencies directly with one another to buy commodities \u2013 instead, they use the dollar as the transaction currency. Every country first converts its currency into U.S. dollars before trading can take place.<\/p>\n\n\n\n
But the U.S. dollar\u2019s dominance as the global reserve currency is showing cracks. While oil is still largely traded in dollars \u2013 and oil-rich nations like Saudi Arabia, the UAE, Bahrain, Qatar, and Kuwait remain under U.S. military protection \u2013 the recent U.S. strikes against Iran have deeply shaken Arab confidence in American security guarantees. Though Iran is a political rival to Saudi Arabia, Riyadh is increasingly prioritizing cooperation over confrontation. The kingdom is in the midst of an economic transformation, and war with Iran would only hinder progress. What\u2019s more, the U.S. appears to be keeping its Middle Eastern allies in the dark about its Iran strategy. Feeling sidelined, Saudi Arabia even temporarily barred the U.S. from using its military bases for strikes against Iran \u2013 a unprecedented move signaling fraying ties.<\/p>\n\n\n\n
For now, the system holds \u2013 but if the alliance collapses, the Saudis would have little reason to keep pricing oil in dollars. Oil sold to Europe could be invoiced in euros, and oil sold to China in yuan. In fact, Saudi Arabia has already joined “mBridge”, a central bank digital currency (CBDC) platform developed by China, Thailand, and the UAE. Transactions on mBridge bypass the U.S. dollar entirely, using digital central bank currencies instead. With China as the driving force, most mBridge transactions are settled in the digital yuan. Some observers now speak of a “petro-yuan” \u2013 not necessarily a full replacement for the petrodollar, but a serious challenger.<\/p>\n\n\n\n
Whether the U.S. dollar will actually be dethroned remains uncertain, but the mere fact that its dominance is no longer unchallenged is remarkable. Remarkable, but not unprecedented. While history doesn\u2019t repeat itself exactly, the pattern shows that global reserve currencies tend to lose their footing after roughly a century. Before the U.S. dollar, the British pound held that role from 1815 to 1944\/45. To recall: The pound became the world\u2019s reserve currency after British and Prussian forces defeated Napoleon at Waterloo. Military victory, combined with Britain\u2019s industrial revolution and naval dominance, cemented the pound\u2019s status. This example illustrates that reserve currencies emerge from a mix of military, political, and economic power \u2013 and they decline when those conditions shift. The U.S. dollar\u2019s time, then, may slowly be running out.<\/p>\n\n\n\n
The Swiss franc as a safe-haven currency is an entirely different story. It remains a refuge even when its strength \u2013 and the Swiss economy \u2013 suffer as a result. Capital flight into Switzerland regularly drives the franc\u2019s value sharply upward, putting heavy pressure on Swiss exports. The situation can become so severe that the Swiss National Bank (SNB) is forced to intervene in currency markets to weaken the franc \u2013 a strategy with little lasting success. This becomes especially problematic when a reserve currency destabilizes, sending massive capital flows toward Switzerland.<\/p>\n\n\n\n
Some observers consider this scenario entirely plausible, pointing to historical precedent. In the 1930s, for example, the franc saw major inflows as the then-dominant British pound came under pressure. The British Empire was gradually unraveling, and the UK was no longer the world\u2019s unchallenged superpower. Though Britain emerged victorious from World War I, it did so only with substantial American support. The pound lost its luster, and the Great Depression of the 1930s sealed its decline. As a result, vast sums were shifted into the franc, causing it to surge in value. <\/p>\n\n\n\n
Experts now see a similar pattern unfolding in the coming years if the U.S. dollar continues to lose influence. A prolonged and significant appreciation of the Swiss franc against the dollar could well be on the horizon.<\/p>\n\n\n\n