Recently, de-dollarization has been mentioned more and more in the financial world. (Source: Medium) |
There are challengers to the dollar's dominance, and history shows that countries with globally dominant currencies can fall from that top spot quite quickly... even in a matter of days.
Important advantages
The US dollar has never had the luxury of being the world’s leading currency. It was only about 80 years ago that the British pound became the world’s reserve currency, a title it held for decades.
The appreciation of the US dollar occurred quite suddenly at the Bretton Woods International Monetary Conference in 1944.
Bretton Woods was a meeting of world leaders at the end of World War II. Together they tried to establish an international trading and financial system that would help tie the world together.
Everyone agrees that to facilitate international trade, there needs to be a common, standard currency that everyone can use.
At the time of the conference, the British economy was in turmoil, so the pound was not the currency that people expected.
Meanwhile, the US economy was quite strong. The country had a lot of gold reserves. Taking advantage of these advantages, the US dollar became the official currency in global trade and investment.
Basically, the USD is at the heart of most business in the world. For example, if you are a clothing designer in Chile and you order cotton from Egypt for some shirts you plan to produce, you will pay for that cotton in USD, not in Pesos or EGP.
The position of the US dollar has given the US an advantage in many ways. For example, domestic businesses have a "home field" (currency) advantage when doing business abroad.
However, as the Bretton Woods International Monetary Conference of 1944 demonstrated, the top position can slip away quite quickly.
“The United States has a significant advantage that can be slowly eroded if we are not careful,” said economist Michael Boskin, a former White House adviser.
Can the USD keep its throne?
Recently, de-dollarization has been mentioned more and more by the financial community.
Earlier this year, China, Russia, Saudi Arabia, the United Arab Emirates (UAE) and Brazil began trading in other currencies: the yuan and the ruble, in a very direct challenge to the greenback’s centrality.
Economist Benn Steil : "Sanctions are like overprescribing an effective antibiotic. The impact of US financial sanctions on Russia has caused many countries to 'turn around' and look for other currencies." |
China has long been trying to replace the US dollar with its own currency. Now the yuan is gaining momentum.
The US debt ceiling is one reason why China's currency could be growing. Its role as the global reserve currency means the US dollar must be reliable. The recent debt ceiling drama has left the US and the dollar in a risky and unstable position.
Mr. Benn Steil, an economist at the US Council on Foreign Relations, commented that the debt ceiling is not the focus of the de-dollarization issue.
The real problem, according to the economist, is that the US government is increasingly using the dollar as a tool for financial sanctions. Financial sanctions against Russia for its military campaign in particular have made many countries question whether they should be so dependent on the dollar.
"Sanctions are like overprescribing an effective antibiotic," he said. "The impact of US financial sanctions on Russia has caused many countries to 'turn around' and look for other currencies."
Economist Benn Steil added that although the yuan or ruble is not as efficient as the dollar, this could lead to a major fragmentation in the global economy.
Commenting further on the issue of de-dollarization, economist Michael Boskin said that the greenback has a lot of momentum right now and is not in immediate danger of losing its top position. However, momentum can change quickly.
With the global economy in turmoil, China and others have begun to see a viable opportunity to usurp the dollar’s position as the world’s reserve currency. Whether or not it will be dethroned in the future remains an open question.
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