Are We Facing Down The Barrel Of A U.S. Dollar Collapse?

Key takeaways

• Currency collapse is a rare event that dishes out huge damage to a country’s economy
• A U.S. dollar collapse is unlikely thanks to its status as the global reserve currency
• For investors, an uncertain currency is a serious risk to be aware of before investing, but luckily it’s pretty obvious when it’s a problem

With talk of recessions, a pandemic in the rearview mirror and a Russian war still ongoing, it can be easy to start catastrophizing about the possibility of a U.S. currency collapse. So it begs the question — could it happen?

Look: it’s an unlikely scenario, and there would need to be a pretty major shift to trigger total currency collapse in the biggest economy in the world. So let’s go through why it’s unlikely to happen and how it could impact investors if it does.

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Could the U.S. dollar collapse?

The usual suspects for a currency collapse are political instability, hyperinflation and if a country has a lot of debt. But the U.S. has a huge advantage in its favor: it’s the world’s global reserve currency.

What does that mean? The U.S. dollar is considered so safe that other countries keep it in their reserves. As for why that is, it’s easy to see: the U.S. has the largest economy in the world. With an annual GDP of $23 trillion, the closest competitor is China with $17.7 trillion.

With this in mind, what could topple the world’s safest and largest economy in a short space of time? We’re talking about a major world war or a meteor wiping out the whole of the U.S. — and let’s just say that if anything like that happened, we’d all have a bit more to worry about than currency collapse.

How would a U.S. dollar collapse affect investors?

Investments are tied to the currency they’re held in. So if your entire portfolio was invested in U.S. companies and the dollar collapsed, you’d have some serious problems on your hands.

This is also true if you’re in another country. When a currency collapses, the exchange rate can send investment values plunging and countries often freeze currency movement to stop the bleeding.

When holding assets in any currency that’s considered risky, you need to do your own research on whether an asset is a good buy or not and understand all of the risks to your capital involved. It’s a high risk and high reward strategy, so it shouldn’t be the majority of your portfolio.

The bottom line

Currencies can and do collapse — just look at Argentina or Venezuela. But when it does happen, it’s a major event that’s the driving force behind it.

In short, it’s unlikely the U.S. dollar is collapsing any time soon thanks to its special status — but it never hurts to diversify your portfolio, just in case.

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