With talks about emergence of new super economic powers such as China and even European Union, there have been reports that US dollar may be losing its grip in international trade. It has also been reported that specific countries have started diversifying their foreign exchange reserves instead of relying solely on US dollars. For example, Bank of Israel will be accommodating other currencies such as Canadian dollar, Australian dollar, Japanese Yen and Chinese renminbi for its foreign exchange reserves. This will be in addition to reversers held in US dollars.
Over the last two decades, share of US dollar in global foreign exchange reserves has been continuously falling. From over 70% in 1999, the numbers are down to 59% in 2021. All these factors make us wonder if American dollar is losing its grip on global economy. To understand if American dollar is on the decline, here are some important things to understand.
Weaponizing the dollar – United States has often been accused of using its currency as a weapon. Most recent example is that of Russian invasion of Ukraine. United States froze close to $630 billion of reserves held by Central Bank of Russia, which was a major setback for Russia. Repeatedly using the dollar as a weapon is forcing countries to diversify their foreign exchange reserves.
Sanctions imposed by US are actually helping China’s renminbi, which has now increased its share of global foreign exchange reserves. Russia has by far the largest share, at around 1/3rd of world’s renminbi reserves. Other countries like Brazil, Switzerland and Mexico have also increased their reserves in Chinese renminbi.
Search for a new international reserve currency – With dominance of US dollar in global trade and foreign exchange reserves, it gives virtually limitless powers to United States. It means that it can dictate terms to any country, without having to worry about financial repercussions. United States can literally print more dollars to pay of its debts, which again is an example of a single country holding too much power.
To fix this anomaly, various countries are thinking about having a separate international reserve currency. This new currency will not be owned by any specific country, which will help avoid misuse and concentration of power. One example is that of BRICS (Brazil, Russia, India, China and South Africa) that is working on this possibility.
Is American dollar on the decline?
While percentage share of US dollar in global foreign exchange reserves may have declined, it is too early to write obituaries about the US dollar. There are multiple reasons why US dollar will continue to dominate. It includes the vast intellectual property owned by US-based organizations and individuals. China may be ahead in manufacturing, but when it comes to intellectual property, there’s no match to US.
Another factor that will continue to sustain US dollar is the combined net worth of US-based multinational businesses. Amazon, Google, Apple, Microsoft, Costco, Walmart, Ford, JP Morgan, IBM, Intel, PepsiCo, Citigroup, HP, Boeing, Tesla, Cisco – the list is virtually endless. Market capitalization of these companies is several times more than United States GDP. No other country on the globe has such positive numbers to show.
Then of course, it’s also common knowledge that US continues to be militarily superior. With such positive factors on its side, US dollar will continue to dominate even though its share in global foreign exchange reserves may have eroded over the years.