U.S. Dollar Supremacy Under Threat

The U.S. dollar it its own worst enemy as its supremacy becomes under threat. The U.S. dollar has led the world economy for a decade, but now its dominance is disputable, with China’s renminbi striving to outrace it, and some influential world bankers calling for more balanced monetary regime as cryptocurrencies represent sharply different model.

As the 2020s begin, it seems that position of a dollar on global capital markets is perfectly stable. On December 30, its value was up 24% over the past decade, despite Federal Reserve throwing more than $2 million new dollar bills on the global market, and national debt increasing to almost $23 trillion.

International Monetary Fund states that dollar takes 62% of the central bank foreign exchange reserves. Some other currencies believed to be rivals to dollar, such as euro, Japanese yen, British pound and China’s renminbi account for 20%, 5.4%, 4.4% and 2% respectively.

Talking about digital assets, praised as the new step in evolution of money, they are hardly considered as an asset class compared to national currencies. Bitcoin’s total market value, for instance, is estimated in some $133 billion, which is far below minimum $213 billion allocated to renminbi by central bank.

Signs of Dollar’s demise?

The dollar’s stable position is under threat, as leading economists claim that international financial system appears to be unsustainable or even unfair.

Foreigners continuously indulge Americans, allowing them to import more than export, and global demand for dollar-backed assets keeps interest rates on such things as Treasury bonds low. This situation forces commercial organizations and households to take on even larger amounts of internal debt, which will be extremely difficult to pay if borrowing costs suddenly increase.

The dollar has managed to keep its positions despite the beliefs that its decline is coming.

Bank of England Governor Mark Carney has recently told U.S. bankers that besides contributing to instability in emerging market countries, dollar also stimulates excessive savings around the world, dropping interest rates. Carney said, that “Past instances of very low rates have tended to coincide with high-risk events such as wars, financial crises and breaks in the monetary regime. Left unattended, these vulnerabilities are only likely to intensify.”

How to resolve this problem? Carney named a “synthetic hegemonic currency” as an alternative to the dollar, noting that it can be provided “through a network of central bank digital currencies.”

Jens Nordviq, a CEO of the data provider Exante, says that if influential people such as Carney pay so much attention to the technology, the idea is not at all far-fetched.

Dollar Domination

Today the dollar is ubiquitous. Almost all assets are denominated in dollars, and cryptocurrencies are not an exception. Prices of Bitcoin and stablecoins are linked to the dollar, and Facebook’s Libra will be reportedly 50% backed in dollars. Even China’s renminbi might become just a proxy to the U.S. currency, despite the country’s efforts to make it a denomination for trade.