Is the US dollars Dominance ending in Trade?
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Despite recent doubts about the dominance of the US dollar as a global reserve currency, its position remains strong due to its immense starting advantage, network effects, and the supply of safe assets available to dollar investors. While individual countries can circumvent the dominant system, a shift to a multipolar system of currencies is not imminent and would be inherently less stable.
The reason why not:
- The US dollar exerts an almighty gravitational pull on the world economy that has not materially weakened, with between a third and a half of global trade invoiced in dollars and nearly 90% of foreign-exchange transactions involving the currency.
- No other currency matches the size and fundamental appeal of the dollar’s ecosystem, which benefits from network effects and the supply of safe assets available to dollar investors.
- While individual countries can circumvent the dominant system, a shift to a multipolar system of currencies is not imminent and would be inherently less stable.
Counter arguments:
- Some argue that the recent admission by Janet Yellen, America’s treasury secretary, that using sanctions “could undermine the hegemony” of the dollar suggests that the currency’s dominance is under threat.
- Others point to the rise of digital payments technologies and central-bank digital currencies as potential disruptors to the dominance of the US dollar as a global reserve currency.
Conclusion:
China’s controlled flows of capital and current-account surpluses prevent it from meeting global demand for safe assets, and the US dollar benefits from network effects. However, individual countries can bypass the dominant system if they want to. For example, Russia now gets 16% of its exports paid in yuan and China’s alternative messaging system is growing, while it also settles more bilateral trades in renminbi.
The use of the US dollar in global trade may not last forever, as other countries could turn to the renminbi or digital currencies for trade. Using the dollar to pressure other countries is not a good way to make friends, and if the US economy shrinks, a multipolar currency system could arise in the future. This would be less stable than the current system, so it is not in anyone’s interest to hasten the shift.
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