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.
The latest report from the Congressional Budget Office (CBO) states,
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).
let's take a closer look at some of the potential threats to US Dollar Dominance .
China as an economic superpower
The resurging super power, 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. Now China is trying to do the same through the Belt and Road Initiative (BRI). And 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
Although some may not see this as threats to US dollar dominance. However, New payment systems such as blockchain technology and peer-to-peer networks are challenging traditional payment systems. They 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
During his recent visit to Saudi Arabia, President Xi Jinping of China spoke to the leaders of the Gulf Cooperation Council. He stressed the need for a new energy cooperation paradigm between China and the Gulf countries. To promote the Yuan’s role in oil and gas trading, President Xi urged the Gulf monarchs to fully utilize the Shanghai Petrol and Gas Exchange and conduct sales using Chinese currency. Progress on this issue seems to be slow, discreet, and cautious, but it has begun. The process is expected to be lengthy. (Source: Syed Rashid Hussain, 2023)
There are several threats that we discussed above that could potentially challenge the US dollar dominance in the future. Several factors support the US dollar’s dominant position, including the stability of the US political system and the strength of the US economy. While finding an immediate replacement may be challenging, these factors contribute to the ongoing power of the US dollar. Still, these threats have some potential for great change in future.
You might be interested in reading more articles from the author Sahrish Khan, Author at EcoFiney
