Threats to US Dollar Dominance: What's at Stake
THREATS TO US DOLLAR’S DOMINANCE
The US dollar has been the dominant currency in global trade and finance for decades. However, in recent years, there have been several rising threats to dollar dominance. Some of the potential threats are China as an economic superpower, Cryptocurrencies and bitcoins, new payment systems, and political instability.
“According to the latest report from the Congressional Budget Office (CBO), the 2020 US federal budget deficit is projected to be $3.3 trillion, or 16% of GDP, a post-war record. By the end of the decade, the CBO projects US debt held by the public to exceed $33 trillion, more than 108% of GDP. Issuing so much new public debt, and the Fed’s role in absorbing that issuance, undermines the attractiveness of the USD, especially if inflation erodes the value of the currency significantly and threatens the credibility of the Fed itself. Steps to limit trade and financial flows internationally would also reduce the dominance of the USD”(Daniel Tenengauzer, John Velis, and Geoff Yu,2020).
Some of the threats are mentioned below.
China as an economic superpower
China is the world’s second-largest economy and has been challenging the US in trade, technology, and finance. China has been promoting the use of its currency in international trade. “The US provided financial resources to create foreign demand for US goods and services, and now China is trying to do the same through the Belt and Road Initiative (BRI) or through the initiative of businesses, focusing not just on emerging markets but also on other economies open to hearing about such plans” (Daniel Tenengauzer, John Velis and Geoff Yu,2020).
Cryptocurrencies and bitcoins
Cryptocurrencies and bitcoins have been gaining in popularity in recent years and are being used as alternatives to traditional currencies. The increasing popularity of cryptocurrencies challenges the dominance of the US dollar. “Russia and Iran are collaborating on a digital currency backed by gold, or “stablecoin,” that might take the place of the dollar as a medium of exchange for payments in global trade. The Jamestown Foundation, a research organization, claims that in recent months, Russia and Iran have increased their efforts to “de-dollarize.” They intend to construct a replacement for SWIFT since they are forbidden from using it, alongside other approaches to increase their trade volume to $10 billion annually” (Zahra Tayeb, 2023).
New payment systems
New payment systems such as blockchain technology and peer-to-peer networks are challenging traditional payment systems and could potentially reduce the importance of the US dollar in global finance. Due to the advancement in technology and the internet, new payment systems are becoming more convenient and easy for people around the globe.
The global political instability
Global political instability is increasing in recent years which raises the tension between major powers. This uncertainty could affect the importance of the US dollar. Investors and governments may become less likely to keep US dollars as a reserve currency when there is political instability in other regions of the world. This is due to the possibility that they are worried about currency variations or devaluations.
The new China International Payments System (CIPS).
The creation of such a system means in the short term that the Chinese currency (renminbi) has the potential to become a truly international, convertible currency and a more attractive currency for conducting international trade and finance. What it means in the long term is that America’s long reign of economic dominance is at risk. (Newspaper, 2015).
A future to petro yuans
While addressing the Gulf Cooperation Council leaders during his visit last month to Saudi Arabia, President Xi Jinping of China underlined there should be a new paradigm for energy cooperation between China and the Gulf countries. In a bid to promote the Yuan’s role as a currency for trading in oil and gas, he urged the Gulf monarchs to ‘make full use of the Shanghai Petrol and Gas Exchange to conduct oil and gas sales using Chinese currency’. They seem to be moving ahead on the issue slowly, discreetly, and carefully. A beginning has been made; the process is long. (Syed Rashid Hussain, 2023)
There are several threats that we discussed above that could potentially challenge the US dollar’s position in the future. Although an immediate replacement is challenging, the US dollar’s dominant position is backed by various factors, including the stability of the US political system and the strength of the US economy. Still, these threats have some potential for great change in future.