(Newswire.net — March 27, 2023) —
The U.S. dollar has long been considered the world’s reserve currency, with many countries holding it as a primary form of foreign exchange.
However, recent events like the rising debt of the United States and the emergence of new currencies, like China’s renminbi (RMB), have sparked discussions about whether the dollar will maintain its dominance in the global economy.
In fact, according to the International Monetary Fund (IMF), the share of global reserves held in U.S. dollars has fallen to its lowest level in 25 years.
So, it is unsurprising that this question persists: Will the U.S. dollar be dethroned?
In this article, we will explore the factors that could potentially lead to the dethronement of the U.S. dollar and what it could mean for the global economy.
What Could Lead to the Dethroning of the U.S. Dollar?
There have been many predictions about the dollar’s demise in the past, but it has consistently managed to remain the world’s reserve currency. So, what is different this time?
The Emergence of a New Rival
For more than 70 years, China and the United States have had a complex relationship — alternating between cooperation and confrontation.
While China has excellent economic and political power, it has not been able to dominate the global flow of fiat currency. It is now trying to change that.
The Chinese leadership made it clear last year that they wanted to raise the profile of the renminbi as a reserve currency. Although China has a large economy and trade flows that support such a move, the country had to convince foreign central banks to start holding its Yuan (the renminbi’s principal unit) in reserves.
So, to achieve this, the Bank for International Settlements and the People’s Bank of China announced a collaboration in July 2022. The Renminbi Liquidity Arrangement will see China, Indonesia, Malaysia, Hong Kong, Singapore, and Chile each contribute 15 billion yuan, or about $2.2 billion.
China is the biggest buyer of Saudi Arabian and other Persian Gulf Arab states’ oil, so Saudi Arabia’s inclusion in this alliance is significant — as it comes at a time when US-Saudi ties have soured. Geopolitical expert Amir Handjani explains this in detail in his piece for Responsible Statecraft.
Also, Russia has already adopted the Chinese Yuan as its de facto reserve currency. Due to U.S. sanctions for its invasion of Ukraine, the Russian leadership turned to China for assistance.
Russia now holds 17% of its foreign reserves in Yuan. Also, the Yuan is the third most in-demand currency on the Moscow Exchange.
Expanding these partnerships could further cement the Yuan’s position as a reserve currency.
Rising National Debt
The federal government’s total public debt is $31 trillion. A massive chunk of that debt is subject to the statutory limit, so borrowing is restricted to $25 million.
The nation’s debt threatens its future in many critical ways, including:
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Reduced Public Investment. As the federal deficit grows, the government will have to spend more on interest costs, reducing public investment. Investing in areas contributing to economic growth will become more complex as more federal resources are diverted to interest payments.
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Reduced Private Investment. By competing for funding on the capital markets, the federal government raises interest rates and discourages new investments. Higher capital costs have the potential to stifle innovation and slow the advancement of innovations that could enhance our quality of life. In the future, investors may doubt the government’s ability to repay debt, leading to higher interest rates — as a result, businesses and households will pay higher borrowing costs.
If the US economy experiences a prolonged period of economic decline, including high inflation or debt levels, investors may lose confidence in the US dollar and turn to alternative currencies.
Advances in Financial Technology
Technological advancements in the financial sector, such as the development of cryptocurrencies, could lead to alternative currencies gaining wider acceptance and challenging the dominance of the US dollar.
While it is unlikely that digital currencies will replace traditional currencies soon, they could eventually be used as an alternative means of exchange, settlement, and investment.
One of the key advantages of digital currencies is their decentralization, which allows for greater transparency and security in transactions. Also, digital currencies can be used for cross-border transactions without intermediaries, such as banks, which can reduce transaction costs and increase efficiency.
Moreover, the development of central bank digital currencies (CBDCs) could also challenge the dominance of the US dollar. CBDCs are digital versions of traditional currencies issued and backed by central banks.
While the use of CBDCs is still in its early stages, some countries, including China, have already launched pilot programs to test their usefulness.
Wrap Up
The US dollar’s position as the world’s reserve currency faces challenges from various fronts. The rising national debt, geopolitical shifts, and technological advancements in the financial sector are all factors that could potentially lead to the dollar’s decline.
However, it is vital to note that the dollar has consistently managed to maintain its dominance in the global economy despite previous predictions of its demise.
It remains to be seen whether these challenges will be enough to dethrone the dollar as the world’s reserve currency, but one thing is certain: the U.S. Dollar is n longer invisible.