Which Currency Will Replace The US Dollar?

Dominance of the US dollar may weaken in the future, but it will be a gradual process and not a sudden event

For decades, the US dollar has served as the world’s primary reserve currency. However, recent geopolitical developments are creating resistance towards the US dollar. One of the common complaints is the unhindered power of the United States to impose sanctions. This is now being seen as a threat by many countries.

While the dominance of the US dollar is being challenged, the question arises as to what will be the alternative to the US dollar. Which currency will replace the US dollar? To answer that, here are some important things to understand.

Currency options to replace the US dollar

Euro – With Europe contributing around 1/6th to the world’s GDP, the Euro is a strong contender to replace the US dollar. There’s political stability in Europe and mutual cooperation and friendly relations with member countries. Cross border transactions are pretty smooth in Europe, which is another big advantage for the Euro. However, the European Union faces multiple challenges. For example, political disagreements can sometimes create roadblocks for decisive action. An ageing population is another concern for the European Union.

Chinese Yuan (Renminbi) – China is currently the second largest economy in the world. The country is a powerhouse in manufacturing, electronics, automobiles and heavy machinery. With a powerful economy, the Chinese Yuan is accepted across many countries for international settlements. However, the Chinese Yuan has issues such as limited capital mobility. Moreover, with a non-democratic setup, there is a lack of transparency in the country’s financial system.

Basket of currencies – Many experts believe that it is unlikely that a single currency will be able to replace the US dollar. Instead, a basket of currencies can emerge as a much better choice. This system will also ensure that no single country enjoys absolute power over the global financial ecosystem. Something similar is already operational with the IMF’s Special Drawing Right (SDR). However, the adoption of SDR as the primary reserve currency has never been attempted.

BRICS currency – There are talks of a BRICS currency that can potentially replace the US dollar. BRICS is a partnership between member countries – Brazil, Russia, India, China and South Africa. Other countries have also joined BRICS such as Egypt, Iran, United Arab Emirates and Ethiopia. BRICS currency can be a powerful instrument, as BRICS member countries account for around 45% of the world’s population. However, the launch and successful rollout of BRICS currency can take several years due to disagreements between member countries.

Conclusion

As is evident from above, creating an alternative to the US dollar will not be an easy task. The US dollar currently comprises more than 60% of global foreign exchange reserves. Even though this number has been declining, the US dollar remains to be the most trusted instrument for international transactions. While alternatives to the US dollar are available, it will take several years to make a successful transition. A sudden shift is unlikely, as it has potential to trigger a major global economic crisis.