Is there a potential downfall for the U.S. currency?
In the world of global finance, a reassessment of the US dollar's dominance is underway. This change in perspective, as explored in the latest edition of the OMFIF Bulletin, is prompting investors and reserve managers to re-evaluate their allocation strategies.
Mark Sobel, US chair at OMFIF, cautions against writing off the dollar too quickly. He suggests that short-term market movements are being mistaken for structural change. The US dollar still dominates about 88% of international transactions due to the size and stability of the US economy, the liquidity of US Treasury markets, and existing global financial infrastructure.
However, potential alternatives are emerging. The Chinese renminbi, gold, and digital currencies, particularly central bank digital currencies (CBDCs), are being explored as potential replacements. The Chinese renminbi, with China's large economy, deep financial markets, and growing share of global foreign exchange reserves, is a key competitor. Yet, its adoption is limited by geopolitical tensions, capital controls, and restricted convertibility.
Gold remains a major safe-haven alternative, valued for its limited supply and independence from government promises. Central banks worldwide are increasingly accumulating gold to diversify reserves and reduce dependence on the dollar.
Digital currencies and blockchain technology are increasingly being explored as alternatives to dollar dominance. CBDCs like China’s e-CNY and the European Central Bank’s digital euro aim to improve payment efficiency and provide monetary sovereignty by enabling faster, lower-cost cross-border settlements without dollar-based intermediaries.
BRICS countries have also discussed alternative payment mechanisms and reserve arrangements, though a unified BRICS currency remains politically unrealistic in the near term.
For any safe asset to rival US Treasuries, it must be built on a foundation of fiscal responsibility, credible repayment mechanisms, and clearly defined rules, as explained by experts at Citi. The rising role of gold in the current geopolitical climate is emphasized by these same experts.
Geoffrey Yu, senior EMEA markets strategist at BNY, argues that talk of comprehensive liquidation of and diversification away from US assets is marginal at best. Yet, concerns persist among reserve managers about potential restrictions to capital market openness and a deterioration in the quality and independence of US economic data.
The debate is no longer about whether a European safe asset is needed, but whether the European Union is prepared to deliver one - and on what terms. The current shift mirrors past periods of geopolitical stress, as Harold James, Claude and Lore Kelly Professor in European Studies at Princeton University, highlights.
In conclusion, while the US dollar remains the dominant currency in global finance, the world is no longer following without question. The focus is shifting towards alternatives, and investors and reserve managers are acting more cautiously. This doesn't mean abandoning the dollar but rather managing the risks around it more deliberately and being prepared for what might come next. The dollar still leads, but the world is no longer blindly following.
[1] Source: OMFIF, various reports [2] Source: BIS, various reports [3] Source: BRICS Business Council, various communiques [4] Source: World Gold Council, various reports [5] Source: SWIFT, various reports
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