The US dollar has been the dominant global currency for almost a century. It has been used as a medium of exchange, a store of value, and a unit of account in international trade and finance. However, in recent years, the position of the US dollar as a global currency has been eroding. This erosion is driven by several factors, including the rise of emerging market economies, the increasing use of digital currencies, and the growing geopolitical tensions between the US and other major economies.
The rise of emerging market economies is one of the primary reasons why the position of the US dollar as a global currency is eroding. Countries such as China, India, Brazil, and Russia have experienced rapid economic growth in recent years, and their share of global GDP has increased significantly. As a result, these countries have become more significant players in international trade and finance, and they are increasingly challenging the dominance of the US dollar.
For example, China has been actively promoting the use of its currency, the renminbi, in international trade and finance. In 2016, the renminbi was included in the International Monetary Fund’s (IMF) basket of currencies used to value the Special Drawing Rights (SDR), a type of international reserve asset. This move signaled China’s growing influence in the global economy and its ambition to challenge the dominance of the US dollar.
In addition to the rise of emerging market economies, the increasing use of digital currencies is also contributing to the erosion of the position of the US dollar as a global currency. Digital currencies, such as Bitcoin and Ethereum, are decentralized and operate independently of traditional financial institutions. They offer fast, secure, and low-cost transactions, making them an attractive alternative to traditional currencies.
While digital currencies are not yet widely used in international trade and finance, they are gaining popularity among individuals and businesses. Some countries, such as El Salvador, have even adopted Bitcoin as legal tender, and others, such as China, are developing their digital currencies. As digital currencies become more mainstream, they could challenge the dominance of the US dollar and other traditional currencies in international transactions.
The growing geopolitical tensions between the US and other major economies, such as China and Russia, are also contributing to the erosion of the position of the US dollar as a global currency. The US has used its position as the issuer of the world’s reserve currency to impose economic sanctions on countries it disagrees with politically or economically. For example, the US has imposed sanctions on Russia, Iran, and Venezuela, limiting their access to the global financial system.
These actions have led other countries to look for alternative payment systems and reserve currencies. For example, Russia and China have been working to reduce their dependence on the US dollar in their bilateral trade by using their national currencies. In addition, they have been promoting the use of their currencies in international trade and finance to reduce the influence of the US dollar.
The erosion of the position of the US dollar as a global currency has significant implications for the global economy. The US dollar’s dominance has allowed the US to borrow in its own currency and run persistent trade deficits, without facing the consequences that other countries would face. This has allowed the US to maintain a higher standard of living than it otherwise would have.
However, as the position of the US dollar erodes, the US may find it more challenging to maintain its current economic policies. The US may face higher borrowing costs and may be forced to reduce its trade deficits, which could lead to a lower standard of living for US citizens.
In addition, the erosion of the position of the US dollar could lead to a more fragmented and unstable global financial system. Without a dominant global currency, international transactions would become more complex and expensive, and countries may be more susceptible to currency fluctuations and financial crises.
Furthermore, the erosion of the position of the US dollar could have geopolitical implications. The US dollar’s dominance has given the US significant influence over the global financial system and allowed it to impose economic sanctions on countries it disagrees with. If the US dollar’s position as a global currency continues to erode, the US may lose some of its economic and geopolitical power.
To mitigate the risks associated with the erosion of the position of the US dollar, some countries have been diversifying their reserves and reducing their dependence on the US dollar. For example, Russia and China have been increasing their holdings of gold and other currencies, such as the euro and the yen. In addition, some countries have been investing in infrastructure projects, such as the Belt and Road Initiative, which aims to increase trade and investment between Asia, Europe, and Africa and reduce dependence on the US-dominated global financial system.
While the US dollar is likely to remain a significant global currency in the near term, its dominance is likely to continue to erode. This trend has significant implications for the global economy, including higher borrowing costs for the US, a more fragmented and unstable global financial system, and geopolitical shifts in power. To mitigate these risks, countries may need to diversify their reserves, invest in alternative payment systems, and reduce their dependence on the US-dominated global financial system.
[Image by Barta IV / Pixabay]
The views and opinions expressed in this article are those of the author.
Mazharul Islam studied at York College / The City University of New York (CUNY).