The death of the dollar, who is the savior?

28 Jan 2023

Since the 1920s, the performance of the US dollar in global capital markets seems to be as strong as ever.

According to data from the International Monetary Fund (IMF), the share of the US dollar in the central bank's foreign exchange reserves has remained at about 62% since January 1, 2010. The second-ranked euro has occupied central bank reserves in the past decade The percentage has dropped from 26% to about 20%, and in the first decade of this century some major economists touted the euro as a potential competitor to the dollar.

A similar situation happened with the Japanese yen. In the 1980s, the Japanese economy developed rapidly, and the Japanese yen was regarded as the most promising world currency to replace the US dollar. However, the Japanese yen now only accounts for 5.4% of the central bank's foreign exchange reserves.

Sterling has dominated global financial markets for a century before World War I, but the current share of the central bank's foreign exchange reserves is only 4.4%. With the UK's exit from the European Union almost certain, the future uncertainty of the pound is gradually increasing.

It seems that the "heavy dollar, the flowing currency", the hegemony of the US dollar in the world economy is still difficult to shake.

However, when the wheel of the era entered the era of crypto tokens, the dominance of the US dollar has been threatened. The continuous growth of the new economy and the use of blockchain and cryptographic tokens seem to have inspired a large number of economists.

At present, more and more economists and world leaders say that the international monetary and financial system is unsustainable and unfair. American consumers have benefited disproportionately from the strength of the dollar because foreigners are actually subsidizing Americans' habit of importing more than exporting.

Although the US federal budget deficit exceeds $ 1 trillion per year, global demand for dollar-denominated assets helps keep interest rates on assets such as US Treasuries low. This dynamic is prompting governments, businesses, and households to take on more and more debt, which could be difficult to repay if borrowing costs suddenly soared.

For decades, the dollar has been predicted to die soon, but so far this prediction has not been fulfilled.

"It's like the shepherd shouting at the wolf," said Martin Baily, a senior research fellow in economics at the Brookings Institution. "Unfortunately, this time the wolf really came."

Mark Carney is a graduate of Oxford University in Economics and has served as Governor of the Bank of Canada and a senior official at Goldman Sachs.

Carney believes that the dominance of the US dollar not only leads to instability in emerging market countries, but also to a “global savings glut”, which artificially reduces interest rates. "In the past, ultra-low interest rates often coincided with high-risk events such as wars, financial crises, and the collapse of the monetary system." "If no one pays attention, these vulnerabilities can only increase."

At present, the best solution is to find a currency that replaces the US dollar, such as the "synthetic hegemonic currency" .

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