So if the U.S. dollar were to collapse as people or the world loses faith into the system, wouldn’t the other currencies collapse with it as they too are based on the faith of the fiat system?
If so why would it reasonable to hold other foreign currencies such as Australian dollar or New Zealand dollar?
Finally, how much worst would the US dollar be compared to other foreign currencies? I assume it would be worst considering the U.S. Dollar is the world’s reserve currency, therefore, there are a lot of dollars in global circulation?
Whether or not it’s reasonable to hold foreign currencies as a hedge against the collapse of the dollar depends, as you suggest, on the likelihood of the collapse of those currencies as well. It may be more reasonable to hold precious metals or other real assets. There could be some foreign currencies, however, that foreigners rush into as the exit their dollar holdings. These currencies might appreciate relative to the dollar even more than real assets.
As you note, the collapse of the dollar is not inexorably linked to a proportionate collapse of foreign currencies. The reason is that foreigners outside the U.S. hold a significant portion of physical dollar currency, around 60 percent, which is much higher than the percent of any other currency, such as the Euro, held by persons outside the Euro zone. Therefore, the collapse of the dollar is much more likely, under your scenario, since those bound to accept the dollar legally, namely Americans, are not holding most of the dollars. Foreigners can easily dump large quantities of dollars on the American economy in a short period of time. Whereas, Americans cannot divest themselves completely of dollars, at least not legally. But, I dare say, only an insignificant portion of Australian dollars are being held by foreigners. So the downward pressure on the Australian dollar is less than that on the American dollar, given that Australians also face legal tender laws for the Australian dollar.