U.S. Dollar: Losing Its Status as King of Currencies!

May 1, 2023 by No Comments

U.S. Dollar is the currency of the United States of America. U.S. Dollar is the standard currency at which most goods and services are traded in the global commodity market.

The U.S. Dollar has dominated the global reserve currency market for many years. Other trading countries heavily depend on U.S. Dollar for international commerce and financial flows has made the dollar currency the most powerful currency.

However, there has been an increase in interest from some nations to look into alternatives to the dollar. This alternative could lessen their reliance on the American financial system. The de-dollarization idea has picked up steam in recent years as more countries explore methods to diversify their reserves and boost their economic independence.

For a long time, the U.S. dollar-dominated the global currency market. It was the most popular over gold, the Swiss franc, the Japanese yen, and Bitcoin in the previous year. However, nations are testing alternatives to reduce the dollar’s hegemony. Alternative like the BRICS currency which could take over the U.S. dollar in the near future.

The U.S. Dollar Dominance

The dominance of the U.S. dollar began shortly after World War I. This currency almost immediately surpassed all other financial powers. This was partly because in 1917, the nation joined the conflict relatively late and came out of it significantly stronger than its European rivals. As a result, the U.S. dollar started to replace the pound sterling as the world’s reserve currency. This also helped the nation start receiving substantial inflows of gold throughout the war.

In 1944, when 44 nations ratified the Bretton Woods Agreement, a global system of currency exchange was established that was linked to the U.S. dollar and the price of gold. This gave the dollar an even bigger position in the world economy. However, by the late 1960s, exports from Europe and Japan were more competitive with those from the United States, and there was a plentiful supply of dollars all over the world. This was making it challenging to back them with gold. Due to this, President Nixon stopped allowing American dollars to be directly converted into gold in 1971. Likewise, this decision effectively ended both the gold standard and the limit on the number of dollars that could be printed.

U.S. Dollar world dominance after WWI
U.S. Dollar world dominance after WWI (Google)

Despite continuing to serve as the world’s reserve currency, the U.S. dollar’s purchasing power has since steadily declined. The trend towards de-dollarisation has united many nations looking for alternatives to the American financial system.

Is the Currency Losing its Status?

The US has a strong economy, stable government, strong military, advanced financial systems, and the rule of law, all of which are factors that won’t suddenly disappear. Many nations, including the US, would like to decline the value of the dollar. As it could possibly increase exports by making them more affordable to foreign consumers. Additionally, it might increase demand for commodities like oil, gold, and others that are priced in dollars. This leads to lowering their price for customers using different currencies.

Similarly, Brazil and Mexico, two rising market nations that significantly rely on these exports, would profit from this. As their own currencies gain strength against the dollar, a declining dollar may also make it simpler for developing nations to pay off their debts that are denominated in the currency.

Despite the potential threat posed by the Chinese currency yuan, the US dollar continues to rule international trade. It accounts for nearly 90% of all foreign exchange transactions. Although it is difficult to imagine the dollar losing its status as a reserve currency in the near to medium term, some economists believe that China’s GDP will surpass that of the US by 2030.

Likewise, one day, if the yuan replaces the dollar as the world’s reserve currency, the dollar would suffer from a decline in demand. This would strengthen the euro and other competing currencies. The effects would be seen both politically and economically, as China would become the dominant global force.

In conclusion, the rise of the yuan and the probable collapse of the dollar could be a significant development in the global economy. The coming decade will be essential in establishing whether the dollar can continue to rule the world or if the yuan will emerge as a significant rival.

How Nations are Reducing U.S. Dollar Dependency?

The market share of the US dollar has fallen by 12 percentage points during the past 20 years. It has fallen from 71% to 59% in 2022. Likewise, Moscow has grown its use of the yuan through two primary strategies. They are increasing the yuan’s share of Russia’s reserves and carrying out direct transactions between the ruble and the yuan rather than utilizing the dollar as a middleman. At the end of the previous year, the Russian Finance Ministry increased the permitted percentage of yuan reserves in the National Wealth Fund to 60%.

Additionally, the Brazilian government recently declared that China and Brazil will conduct direct currency exchanges, cutting out the US dollar as a middleman. Furthermore, by exchanging yuan for reais, the Brazilian real, and vice versa without utilizing the US dollar, China and Brazil will be able to carry out their massive trade and financial activities directly.

Chinese President Xi Jinping and Russian President Vladimir Putin at the Moscow submit
Chinese President Xi Jinping and Russian President Vladimir Putin at the Moscow submit (The Washington Post)

Similarly, two of the biggest economies in Asia, China, and India, have each started their own initiatives to weaken the US dollar’s sway over trade. In order to make it possible for them to settle deals in their own currencies.

Furthermore, as part of a massive push to de-dollarize commerce, the Reserve Bank of India (RBI) has also taken necessary steps. RBI has permitted central banks from 18 nations, including Tanzania, Kenya, and Uganda, to register unique Vostro Rupee Accounts (SVRAs). This will allow them to settle payments in Indian rupees. Likewise, Russia has also argued in favor of using the Indian rupee instead of dollars in international commerce.

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