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There is more and more talk of challenging the money. Countries hit by US financial sanctions related to the war in Ukraine regard these efforts as a “dollar weapon” and seek to promote alternatives to the dollar as the currency used in most trade and as a global reserve currency.
Cryptocurrency fans argue that cryptocurrencies are better than any government-backed money because cryptocurrencies cannot be manipulated by governments or central banks.
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The dollar still rules despite the challenges
Warnings of this kind are nothing new. In the 1990s, the Japanese yen was discussed as a substitute for the dollar. Then it was the euro. We expect the dollar to retain its supremacy.
However, that does not mean that changes are not afoot in the international payments system. It’s important to know what’s coming as the dollar faces new rivals.
First, consider what is at stake. By issuing the world’s most widely used currency, the US enjoys several major economic benefits.
Global demand for dollars is helping interest rates stay lower for borrowers here. The ubiquity of the dollar in global trade lowers transaction costs across borders and also lowers the price of imported goods. Borrowers in the US also don’t have to worry about fluctuations in the currency in which they borrow.
Which currencies pose the biggest challenge to the dollar?
Now several emerging countries want to replace the dollar by creating their own common currency, which is somewhat similar to the euro. They resent the dollar’s role in trade. But it is very difficult to band together to launch a new currency.
The more likely challenger: China’s yuan. Beijing wants China to be spared future financial sanctions like those imposed by Washington on Russia. It has already built its own international payment system as an alternative to SWIFT, the long-dominant system from which Russia has been cut off. It also manages to use the yuan in more cross-border transactions. Russia in particular has appropriated the Chinese currency to help it upsell its energy and other exports.
China wants to oust the dollar to become the world’s new superpower. While the yuan is sure to find wider use, it is unlikely to replace the dollar. China will not liberalize its finances to give the yuan the benefits of the dollar, its ease of use, convertibility, freedom to fluctuate in value according to economic conditions, and so on.
The challenge from the USA
The most immediate threat to the dollar’s reserve status is likely to be domestic: the risk of the US exceeding its debt ceiling and missing interest payments on government bonds is eroding global confidence in the dollar.
We still believe that Congress and the President will avert this threat. But our fiscal burdens will not go away, a harsh political reality both parties must contend with.
This prognosis first appeared in the Kiplinger Letter. Since 1925, The Letter has helped millions of corporate executives and investors turn a profit by providing reliable forecasts about business and the economy, and what to expect from Washington. Get a free copy of the Kiplinger Letter or subscribe.
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