Rebellion against the dollar
The dollar’s dominance of global trade and capital flows dates back at least 80 years. Over the last eight decades, the U.S. has been the world’s largest economy, most influential political entity and most powerful military force.
However, economists from other countries are increasingly worried that the country has “weaponized” this position of power in recent years, according to the CBC. The U.S. implements sanctions to punish countries in conflict, threatens to devalue its own currency to win trade wars and leverages it to support its own economy at the expense of the rest of the world.
Unsurprisingly, these moves have inspired a backlash from China, Russia and other prominent countries.
At the 14th BRICS Summit last year, Russian President Vladimir Putin announced measures to create a new “international currency standard.” Meanwhile, China has been urging oil producers and major exporters to accept yuan for payments.
This rebellion against the U.S. dollar could erode some of its influence, but there are reasons to believe the greenback’s dominance will be sustained.
Replacing the dollar would be hard
The U.S. dollar’s dominance is underappreciated. As of late-2022, the greenback accounts for 59.79% of total foreign reserves. In comparison, the Euro accounts for 19.66%, while the Chinese renminbi accounts for just 2.76% of global reserves.
China could expand its market share by twenty-fold and still lag the U.S. dollar by a wide margin.
Put simply, replacing the U.S. dollar in foreign reserves is easier said than done.
Other countries have a lot of catching up
Reserve currency status is closely correlated with the size of the issuing country’s economy. In other words, the largest economy usually has the reserve currency status.
During the 19th century, the British pound was the world’s reserve currency because the British Empire’s colonies needed it for trade and commerce. For the past century, the U.S. dollar has dominated because the American economy is the largest by far.
China’s growth has slowed down in recent years and some believe it will never overtake the U.S. Meanwhile, Russia was the 11th largest economy before it invaded Ukraine, despite being economically smaller in size than California or Texas alone.
And India is growing rapidly, but it would need to grow 628% to match the U.S.’s GDP today. That could take 25 years.
America’s economic lead is simply insurmountable.
The U.S. will still be OK
The final reason Americans shouldn’t be worried about the dollar losing influence is that the worst-case scenario isn’t so bad. Some analysts believe that the future could be more multilateral.
The U.S. may lose influence in some segments of the global economy but not lose dominance everywhere. For instance, the Chinese yuan could become more important for trade and cross-border payments, but the dollar could remain the preferred reserve currency for central banks of developed nations.
That’s far from an economic nightmare for Americans.
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