Will the U.S. Dollar Lose Its World Reserve Status?
The influence of the U.S. dollar worldwide has been decreasing and the trend continues. Its share of global central bank reserves dropped from 72% to 58% in just the past ten years. China, Russia, Saudi Arabia, and Brazil are increasingly shifting to the yuan when trading with each other. Nevertheless, Goldman Sachs believes there is little risk of a change in the global currency order in the foreseeable future. Learn why losing its world reserve status is an unlikely scenario for the U.S.A. especially over the next decade.
Source: Candice Tse, GSAM Connect, DE-DOLLARIZATION: CURRENCY CONTENDERS, May 9, 2023
The three main contenders to the U.S. when it comes to the world reserve currency are the Chinese yuan, the euro, and a potential BRIC currency. But these contenders face significant obstacles:
The Chinese Yuan
The Chinese Yuan lacks frictionless convertibility, regulatory transparency, and trading depth. Also, since China is a net exporter, it is incentivized to limit appreciation of its currency. If the yuan’s global reserve status increases too much, the higher demand would push the yuan’s value up.
The euro faces too many obstacles to obtaining the preeminent reserve status because of its decentralized structure. One member country’s struggles can have a negative effect on the currency. Also, each member country that uses the Euro has its own central bank with an independent agenda.
A BRIC Alternative Currency
If Brazil, Russia, India, China, and South Africa created their own currency, they would face similar obstacles as the Euro and China. A “key feature of a reserve currency is that it is attached to a major economy with liberalized capital markets.”
The U.S. Dollar
The U.S. has a more stable and reliable structure due to its deep capital markets and exchange rate agreements with over 30 countries. Despite the U.S.’s growing debt levels, its “nominal interest expense as a percent of GDP remains in-line with long-term averages at 1.9%.”
The global dominance of the U.S. currency is slowly decreasing, but Goldman Sachs predicts that it will continue to be the dominant force for quite some time.
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