By Kaoutar Nasser | Staff Writer
There has been a consistent trend of diversification in currencies used for global financial transactions and trade. Recent headlines have highlighted the dollar’s continued dominance in the global economy, raising questions about the prospects for this currency’s position as the dominant global currency. This article explores whether these risks will be affecting the dollar dominance and how it will affect the global economy.
1.What is the Dollar’s Dominance?
“Dollar dominance” refers to the predominant role that the US dollar plays in the global economy. For decades, the dollar has dominated the global monetary system. Currently, about 60 percent of foreign exchange reserves held by central banks are in US dollars, and nearly 90 percent of all currency transactions involve the use of the dollar. This dominance is significant because it gives the US a significant economic advantage and allows the US government to finance its debt at relatively low interest rates. The dollar’s dominance is evident in several ways, including as a reserve currency, a means of payment for commodities, and the currency of choice for international trade.
- The Recent Headlines about the Dollar’s Dominance
Recent headlines have drawn attention to the dollar’s continued dominance in the global economy. For example, a recent report from the International Monetary Fund (IMF) highlighted the continued role of the dollar as the dominant global currency, even as the euro and other currencies gain in prominence. On the other hand, there have been events that have raised concerns about the US dollar’s dominance in international trade. For example, Saudi Arabia has expressed interest in trading in currencies other than the US dollar, while China and France have completed an LNG deal using the renminbi yuan currency. Brazil has also agreed to trade directly with China using their own currencies, and India has launched programs to settle transactions in their own currencies, reducing the reliance on the US dollar. These events suggest that there is a growing trend towards de-dollarization in international trade.
- The Future of the Dollar’s Dominance
While the dollar has declined over the past six months, it remains close to a 10-year high versus currencies of countries with which the U.S. trades. It also remains the primary currency used for trade and financial transactions in the global economy. The size of the recent non-dollar transactions that have raised alarm is very small. Even if there were many de-dollarization events happening around the world, the world still has confidence in the US. Therefore, the US dollar, as mentioned by the Carson Group, and moreover, the size and openness of the U.S. market, is difficult to match. Thus, there aren’t any viable reserve currency alternatives for the moment.
Ultimately, there is a possibility of the dollar losing some of its value, yet it will still maintain its dominant position as other currencies strengthen their importance in the global market. According to Eswar Prasad in his article “The US dollar might slip, but it will continue to rule” published in the International Monetary Fund,
“The upshot is that the dollar’s role as the dominant reserve currency will likely persist, even if its status as a payment currency erodes, which itself is uncertain.”