US Dollar is the most widely used currency in foreign transactions. The dollar is again the main reserve currency, which is dominant in most countries of the world. China has already overtaken the United States to become the world’s largest economy, but the lion’s share of China’s huge economic reserves is the dollar. The value of the dollar could fall at any time. Realizing this, China has been reducing its dollar reserves since 2014. In 2014-16 they have reduced the dollar reserves by 1,000 billion and now they are giving precedence to gold as a reserve instead of dollars. Over the past few years, China’s gold reserves have risen sharply. On the other hand, Russia’s gold reserves are growing at a normal pace.
Why are China and Russia increasing their gold reserves by reducing their dollar reserves in certain times and circumstances? They know well that the days of currency, especially dollars, are coming to an end in the Fiat paper. Many economists, including Mike Maloney, Harry S. Dent, Peter Schiff, and James Rickards, have made a number of documentaries on YouTube. We will soon see the dollar fall, first a short deflation then the biggest hyperinflation in history and throw the dollar in the dustbin.
Russia and China have already decided to exclude the US dollar from bilateral trade. The two countries have decided to use their national currencies in bilateral trade. They signed an agreement in this regard in 2019, according to the Russian daily Ivestia. Back in 2018, Pakistan has also decided to trade in local currency excluding US dollars for trade with China.
If the stability of a currency depends entirely on its issuer, then the condition of the dollar is very fragile. US President Donald Trump had trade war with many countries in the world. His administration retaliated by imposing tariffs on goods from other countries, including China. Trump’s involvement in Russia’s and Turkey’s disputes triggered them to challenge the US dollar’s dominance. The International Monetary Fund (IMF) estimates that about 72% of the world’s reserves are now in dollars. Of the rest, 20 per cent is in euros and 5 per cent is reserved in yen and British pound. The US dollar is also playing an important role in foreign exchange transactions. The dollar accounts for 75% of all transactions worldwide. The US Federal Reserve has also maintained a policy of holding the dollar in the lead and trying to maintain sufficient liquidity to ensure that the dollar dominates the world economy.
Complications of Dollar:
Dollar liquidity attracts investors as they consider it a safe currency because the dollar can be exchanged quickly at any time. But it also has the opposite side.Everybody rushes to the exchange market for dollar when they can feel uncertainty. But most of the major blows to the world economy come from the United States. The same thing happened during the economic crisis of 2007-08.
Economist Barry Eichengreen described the situation as a “huge advantage” for the United States. But at the moment he does not see any alternative to the dollar. The two potential rivals of the dollar, the European euro and the Chinese yuan, themselves have many problems. Eichengreen says the state has no control over the euro, while state interference in the yuan is high. That is, there is no single government that can ensure financial stability by supporting the euro in times of great crisis. China’s yuan market, on the other hand, is not controlled by the nature of the market, but by the will of the country’s government. Even then, the possibility of a dollar’s dominance in the world economy cannot be ruled out. On top of that, no one trusted Trump’s economy anymore as he was embroiled in controversy with China, Russia and, lately with Turkey. As a result, in the current economic environment, many people do not think the dollar is as safe as before. Therefore, the question arises, which currency can challenge the dollar?
Russia and Turkey have already announced that they are interested in trading in their national currencies instead of the dollar. If these two countries can persuade others to do the same, then the dominance of the dollar will obviously be reduced in large volume. Moreover, the dominance of the dollar could be threatened due to digital yuan.
The digital yuan is a form of government digital currency which is basically a digital form of paper currency. The difference is that this it would not remain in a person’s wallet, but in smart phone. According to a survey by the Bank of International Settlements, at least one-fifth of the world’s population will use digital currency in next few years.As usual, the Chinese digital yuan is at the forefront of this competition. They have already experimentally traded 500 million worth of yuan.
In the world of digital currencies, the value of the US dollar may fall in the global reserve market. Then different countries will be able to exchange directly in digital currency and the dollar will not be needed as a common medium.
Michael Sung, a digital currency researcher and professor at Shanghai Fudan University in China, said people would then reduce their use of the dollar. He added that the value of the dollar is much higher as all countries have reserves in dollars. But if it is possible to pay the bill directly, the use of dollars will decrease. Meanwhile, China has begun the internationalization of the yuan. The move is aimed at reducing the impact of the trade war with Washington. It also has concerns that the United States will use the dollar as a weapon against it.
Experts say China’s introduction of the digital yuan is an attempt to snatch global power from the United States. The alternative world orders that China wants to create, the yuan will be its tool. But it all depends on how much other countries accept the digital yuan. In fact, emerging countries will also adopt the digital yuan if it can make international transactions easier and cheaper.
In August 1971,The monetary system of Bretton Woods came to an end. The then US President Richard Nixon came out of the gold reserves as a reserve,which opened the door of the dominance of the US dollar. The trend is still going on and it is still the strongest currency in the world. This is largely due to the confidence of other countries in the US economy, energy and policies. This system has given them huge economic and political power. But the rise in the Chinese yuan, as well as rising US inflation, budget and fiscal deficits, and rising interest rates, have made dollar demand more likely to decline. In contrast, the yuan’s international transactions have risen 24 percent in the past two years. In 2019, its amount stood at 19.6 trillion. Since 2014, China has been continuing this effort in various ways liike investing internationally in various bonds. In June this year, the international investment in yuan-based bonds stood at 7.8 trillion yuan. By opening up their financial markets, they are attracting investors like Goldman Sachs and JPMorgan Chase.
To sum up,as long as the United States has enough political and economic confidence from investors, the dollar is likely to remain strong but likely to lose dominance in near future.
The writer is an independent analyst on Business & Economic issues.