Advantages seen in the decreasing weight of the greenback
Diversification of reserve currencies can strengthen financial system, forum says
Although the US dollar may remain the dominant currency for the foreseeable future, its eventual decline in weight could strengthen the international financial system, a forum has heard.
Webinar panelists reached some measure of that consensus at Tuesday’s event hosted by the Hutchins Center on Fiscal & Monetary Policy and the Brookings Institution. The forum was titled “The Future of the US Dollar: Are Its Days as the World’s Dominant Currency Numbered?”
Eswar Prasad, senior fellow at Brookings’ global economic development program, said the greenback will remain dominant for the foreseeable future despite technological changes and the rise of other global currencies.
In an International Monetary Fund blog published last week, economists said the dollar’s dominance is eroding against non-traditional reserve currencies.
“The dollar’s share of global foreign exchange reserves fell below 59% in the last quarter of last year, extending a two-decade decline, according to IMF data on the currency composition of official foreign exchange reserves” , said IMF economists Serkan Arslanalp, Barry Eichengreen. and Chima Simpson-Bell wrote in the blog.
Prasad said the United States still accounts for about 25% of global GDP after shrinking in recent years, and the United States has the world’s largest fixed income markets. For these reasons, “the US dollar still performs well above its weight in global finance.”
Less pressing role
However, he said the role of the dollar as a medium of exchange might be much less urgent.
Zach Pandl, managing director of global investment research at Goldman Sachs, told the webinar that China’s development goals, reaction to US financial sanctions against Russia through the dollar payments network and new technologies are the three main forces reducing the value of the dollar. international part.
Pandl said that although China is the world’s largest trading nation, most international trade is conducted in US dollars, so China has been working to reduce economic vulnerability through various measures such as development. its own cross-border payment system, the addition to the special program The Basket of Drawing Rights (an international basket of reserve currencies created by the IMF in 1969 to supplement the official reserves of its member countries); and the development of the digital renminbi, the internationalization of its currency leading to the displacement of the dollar in certain areas.
The moves were also “a reaction to sanctions” as Russia took steps to turn away from the dollar after sanctions were imposed on the country following its annexation of Crimea, Pandl said.
The European Commission has started to pursue the objective of internationalizing the euro more diligently, given the current financial risks.
The third force is technological. Although blockchain technology, including cryptocurrency, is still in its infancy, it’s hard to predict how it might evolve, Pandl said.
“And perhaps with less reliance on a single country’s banking system…(there might be) less vulnerability to a particular country’s foreign policy objectives…enforced through the currency markets,” Pandl said.
The IMF blog also indicates that many countries are increasing the diversification of their foreign exchange reserves.
“In an example of the broader shift in the composition of foreign exchange reserves, the Bank of Israel recently unveiled a new strategy for its more than $200 billion in reserves,” the blog read.
For the U.S. economy, there are bright spots if the dollar loses share, said Kathryn Dominguez, a professor of economics and public policy at the University of Michigan. She said a strong dollar as a reserve currency is in the national interest, but “exporters are less competitive when the dollar is stronger.”