Can anything challenge the almighty dollar's dominance? | Business Beyond

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as is an era of dollar domination if

they can be said to be a world currency

the US dollar is undoubtedly it the vast

majority of international trade is done

in dollars and it's the currency of

choice for central banks hoping to save

up for tough times so in this video

we'll explain the Dollar's rise to power

people use the dollar because they've

always used the dollar we'll find out

what keeps it at the top of the money

tree where would you rather be invested

right now when you look at the world as

a whole for many people the answer is

the U.S

and reveal whether the Dollar's

Supremacy can ever be challenged if so

by what some changes are coming even for

the dominant currency such as the dollar

it could become a less important payment

currency in international transactions

all the dollars days as the king of

currencies numbered or has it attained

an unassailable edge

find out in this edition of business

Beyond

1944 a war that's brought misery to

Millions is entering its end game

meanwhile the dollar is being set on

course for world domination

meeting at Bretton Woods in New

Hampshire representatives of 44

countries agreed to a New World Monetary

order with the U.S currency at the

center of it

certainly the U.S emerged from World War

II as the world's uh dominant eating

economy and the Bretton Wood system that

was created after World War II uh had

embedded within it as a particular role

for the dollar I mean the dollar had a

link to Gold but other currencies

we're all linked to the dollar so the

post-war monetary system uh embedded

within it the centrality of the dollar

we must protect in the 1970s U.S

president Richard Nixon ditched the

Dollar's convertibility to Gold but by

then it had already been firmly

installed as the central currency for

global trade crisis every year and

because of the United States size the

dollar in a sense was a natural currency

for most International transactions and

there's the added advantage that because

the dollar was the central currency of

the system if two countries wanted to

trade with each other the easiest

currency to use was generally the dollar

and so it continues to be if entities in

two different countries with two

different currencies want to trade with

one another they'll almost certainly do

so in dollars the US currency is

involved in 88 percent of international

transactions

what's more the dollar is the currency

of choice for trading in all manner of

globally important Commodities like oil

coffee and gold but as well as sitting

at the center of global trade the dollar

dominates in another key field and

regardless the world's most important

Reserve currency that is it is the

currency in which foreign central banks

hold their doing their funds so to speak

when it comes to having money set aside

for hard times to fund exports service

debt or balance their own currency

central banks and treasuries more often

than not put their faith in the dollar

according to the international monetary

fund of all of the foreign exchange

reserves held by countries around the

world over 60 percent of them are in

dollars no other currency comes close

the reality is that there aren't any

serious arrivals to the dollar as a

reserve currency when a country wants to

make its currency a reserve currency

needs to issue a lot of what they

considered safe assets by the rest of

the world and much of the rest of the

world foreign investors both private and

official seem to view U.S government

securities as a very good place to park

their money during times of economic

turmoil what does the Dollar environment

provide for investors deep and liquid

Capital private Capital markets a legal

system that protects property rights and

free flow of capital the US has also

been more willing than other countries

to be the lender of Last Resort so I

think all these factors create this

environment whereby and I think this is

important to underline as well we're not

saying these factors are perfect but on

a relative basis they seem to be more

favorable for the US dollar to be a

global Reserve currency we'll talk about

whether any other currency can have a

rival the dollar in the world's reserves

shortly but first let's look at what the

existent dollar Supremacy means for the

United States

there's a term that often gets used when

discussing this very subject originally

coined in the 60s by French Finance

Minister and later president Valerie

he describes dollar dominance as

America's exorbitant privilege

he was making a specific point about the

use of dollars by central banks in

Europe but that core idea that the U.S

benefits greatly from its currency's

power is still often cited the privilege

is generally thought to be that the US

and particularly the US government can

borrow internationally at a slightly

lower rate than would otherwise be the

case the U.S can Finance current account

mostly trade deficits more readily and

more easily and with fewer risk than

other economies

uh and that certainly there's an element

of Truth to that although

all the major advanced economies Finance

themselves in their own currency without

any real difficulty and often can

Finance themselves at lower rates than

the US does

so the constant Global demand brings

advantages to the United States itself

however what some describe as America's

privilege can also sometimes be its

burden

one of the criticism is there is a lot

of demand for the US dollar what does

this do to the currency it leads you to

appreciate and to be stronger than other

currencies and the repercussions for the

U.S economy is that it makes U.S exports

less competitive a stronger currency

will make U.S manufacturing for instance

less competitive and some associate the

long-term decline in U.S manufacturing

sector in part to the to the role of the

US dollar as a reserve currency it also

creates a burden on the feds the FED has

to in certain cases act as the dollar

lender of Last Resort to the world and

it did take up on that role in the

global financial crisis and during the

covet shock through the swap lines

uh that's in some sense a burden but

it's also to some in some sense a

necessity uh because the the offshore

dollar market is actually an important

market for

funding U.S companies and so instability

in the offshore dollar market would

clearly reverberate back that's what it

means for the U.S but what are the costs

and benefits of global dollar Supremacy

for the rest of the world is the lack of

competition at the monetary top table a

positive or A negative certainly there

is sort of a network efficiency uh that

comes from having a dominant currency so

that you know two countries in Africa

that want to trade with each other know

that that they can settle that trade in

dollars and if they have dollars they

can conduct that trade and they don't

have to worry about negotiating a

a settlement currency for every

transaction

so everybody using the dollar is

basically convenient

everyone knows where they stand and

there's no messy bartering over which of

two parties has the most desirable

currency to hold

but the involvement of dollars in so

much of World Trade leaves economies far

away from the United States subject to

the effects of decisions taken there

U.S monetary policy which is directed at

domestic U.S conditions ends up having

an outsized impact on Global Financial

commissions and that can at times

contribute to Financial

economic difficulties around the world

everybody in the past year has faced

pressure on their currency in part

because the U.S is a big economy and any

shift in U.S monetary policy would have

an impact globally but also in part

because the dollar

is used around the world and dollar

interest rates have gone up around the

world and so uh the the impact of

dollars strength and fed tightly gets

magnified so that's the double-edged

sword of dollar dominance but could it

actually be any other way

let's get down to that question of

whether the U.S currency is supremacy

could ever be challenged and if so by

what

so let's go

let's go deeply with capital markets

protection of property rights Capital

flows that are free

how are they likely to change in five to

ten years and where will these factors

be more favorable than in the US

can we look at another country that is

as willing as the U.S to be the lender

of Last Resort when you look at the

global foreign reserves dollars dominant

next is the Euro so when the Euro was

created in 1999 it was believed that the

Euro area could

um end up with its currency becoming a

serious competitor will dollar as a

reserve currency as a payment currency

and so on and it is true that the Euro

area economies are put together had a

science that was roughly equivalent to

that of the US although that has shifted

a bit over time

now Euros or financial markets are quite

large but certainly not as large as

those in the US we saw earlier that the

euro is number two when it comes to the

world's foreign currency reserves albeit

by some distance so what would have to

happen for The Gap to close

well one key thing holding the Euro back

comes down to the very essence of the

Eurozone it's a monetary Union made up

of countries using the same currency but

with very different economies

as we went through the Eurozone debt

crisis and other problems in Europe it

appears that foreign investors don't

quite you for instance a Greek

Government Bond and the same way they

would a German bull which is seen as a

lot a safer and more liquid

so if you pick the size of Eurozone

financial markets it's concentrated and

the core part of the Eurozone it looks

much smaller than the US can the

European Union move to a credible fiscal

Union

in the next five to ten years I think

that could chip away a little bit from

the U.S dollars to roll the Dollar's

strength just recently has been partly

down to the U.S economy's resilience to

current world events that's something

that sets it apart from the Eurozone

war on the eu's doorstep and the

economic hardship it's wrought on many

European citizens has laid bare how

vulnerable the Eurozone is to

geopolitics

Europe has been you know dealing with

centrifugal fuse forces that threaten to

pull the Zone apart so there is a fair

degree of political instability uh

within the Eurozone and that of course

the axis and Reigns

um but if you think about foreign

investors um trying to find a place to

put their money for the long term and

there might be some concerns about

Europe so the reality is that the

fragmentation that we've seen in Europe

despite the currency Union I think has

kept the Euro from becoming a sub

currency that could compete is over the

US dollar

so it seems we're not about to enter the

Euro era just yet but if not the Euro

can any other fiat currency ever rise to

compete with the dollar

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could the world's second biggest economy

behind the US provide the breeding

ground for another truly Global Currency

because it was only

um about a decade ago that the Chinese

government seen willing to allow the um

it will be more widely used around the

world and seem to be

designers of making that an Indian

International currency and Beijing

scored a big win in its efforts to

establish the Renminbi as a major

Reserve currency back in 2016. the Yuan

joined the ranks of the dollar the

Japanese Yen the British pound and the

Euro when the international monetary

fund added it to the basket of

currencies that make up its special

drawing rights or SDR that's the IMs own

Reserve asset that countries can use to

top up their foreign Reserves since then

the Chinese currency has lost momentum

there any beer is essentially flatlined

and that's because the Chinese economy

first of all was not doing so well and

the foreign industries were a little

weary of putting their money in China's

financial markets but more importantly I

think foreign investors don't have as

much trust in their inventory because

China does not boast of many of these

institutional uh framework elements that

virtually every other Reserve currency

economy enjoys such as the rule of law

where even the government has to play by

the rules of game once they are

determined and then China has the

National limitation that China cannot

put its International reserves in itself

um and so until there's an offshore Yuan

Market of enormous eyes China's reserves

are are their choices are more limited

it's possible to imagine a world where

more countries would want to hold their

reserves in Yuan

the U.S and EU were able to hit Russia

in the pocket after its invasion of

Ukraine by freezing moscow's access to

its dollar and Euro Reserves

the current system means the West has an

overwhelming Stranglehold on the world's

money stores no doubt some smaller

countries uh could uh consider whether

or not they wanted to take the risk

associated with putting more of their

Wizards in the Yuan whether as in an

alternative to the dollar or as a hedge

against the rest that your relationship

with him but United States might might

deteriorate

but would that be enough to enable the

Chinese currency to compete with the

dollar

I don't think that mnb has the potential

to become a serious arrival to the

dollar especially as a reserve currency

although as China becomes more important

in the global economy the global trading

system and if China places cards right

with certain reforms

um to maintain the free flow of capital

across its borders I could see that it

will be becoming a more important

payment currency but still not one that

really seriously threatens to the dollar

okay so that's basically the Euro and

the Yuan out but what about other

National occurrences how about the

British pound or the Japanese Yen

well despite having a couple of

centuries of global domination itself

the UK currency is showing no signs of

returning to past glories and the share

of global reserves denominated in Yen

has actually declined in recent years

though the US Dollar's share has been

falling a little it hasn't been because

of the behavior of other major

currencies but this entire decline in

the dollar share has been taken up by

the smaller Reserve currencies such as

the Canadian dollar

um the Australian dollar and the

smattering of other currencies so act

most I see

um some of the shares of these second

and third game currencies Rising

marginally the dollar share perhaps

dropping a little bit but the gulf

between the dollar and all the other

currencies is if anything widening right

now

but could stiff competition come from a

total newcomer 2023 kicked off with

Brazil and Argentina saying they were

beginning work on a shared currency with

the aim of eventually allowing other

South American countries to join

it would be the world's second largest

currency Union after the Euro but

probably therefore even less likely to

challenge dollar dominance

so if traditional Fiat currencies are

showing no sign of unseating the dollar

could competition come from elsewhere

and outside of the control of central

banks

cryptocurrencies provide speculators

with a place to park their money and a

means by which to buy products across

borders so could they ever perform the

same functions for economies around the

world

we certainly seem to be entering a new

era of competition and money with

privately issued currencies such as

cryptocurrencies potentially taking on

some of the functions of money but the

reality we've seen it is that the

decentralized cryptocurrencies such as

Bitcoin which are basically issued and

managed by computer algorithm rather

than by any institutional agency they

seem to have a very volatile value and

are not working very well as mediums of

Exchange

but look at bitcoin's performance over

just the past two years shows you that

that's all too true its value against

the dollar has fluctuated wildly

there are so-called stable coins that

aim to provide a less risky investment

but they do so by pegging themselves to

other assets like for example Fiat

currencies I think compared to most

cryptocurrencies the dollar actually has

a ton of advantages

well regulated certainly by comparison

to crypto markets financial institutions

that can act as intermediaries a deep

and liquid market for interest varying

Securities

um a counterparty if you buy U.S

treasuries uh that is the most credible

counterparty in the Global Financial

system so I actually have a little bit

of difficulty believing that

cryptocurrencies are a realistic

alternative to be honest and we'll

probably spend many years debating at

the relevance of cryptocurrencies

as a reserve currency for the world

let's see what happens in the next five

to ten years our central banks going to

move towards digital currencies that are

less speculative in nature and more

stable in value then the answer could

change

so no obvious signs of cryptos

challenging the dollar either but just

because no Challenger among the digital

or traditional currencies seems likely

to emerge that doesn't mean we won't see

the Dollar's power diminish

and new technologies PLUS Financial

development and energy mind it's it's

making it easier to create a personal

Emerging Market currencies without an

intermediating currencies such as six

dollars so the Dollar's role has a

vehicle currency in international

payments um I think it's likely to

decline but what's our overall verdict

are the days of dollar dominance showing

any signs of ending I think we could

live in a world where it doesn't remain

such a dominant uh Global Currency and

Reserve currency but I I

do not see these factors as playing out

to unseated completely I think it is

hard to see the dollar ever just

becoming another small currency that's

not a big part of the the global system

some changes are coming even for a

dominant currency such as the dollar as

a reserve currency however my viewers

said the dollar is likely to retain its

dominance for a long time to come that's

all from this edition of business Beyond

but if you've made it this far we reckon

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