An interesting discussion has taken place on the LinkedIn group “Conversations on the real economy” regarding the status of the dollar as a reserve currency in the future. LinkedIn discussion
Will the dollar lose its reserve currency status in the future? What will be the replacements? How will it shape the financial architecture going forward? Why this change is happening? What are the geopolitical consequences of this? Let me give me the answer one by one.
Will the dollar lose its reserve currency status? Yes & No. Around 56% of the world’s foreign reserve is in the dollar closely followed by 20% in Euro. The rest of is in Chinese Renminbi, Japanese Yen, Canadian Dollar, Swiss Franc, and British Pound. US Dollar will lose a huge share in global trade in the future post-Russia-Ukraine but it will remain a major currency. The process of de-dollarization has been ongoing for a few years but it will accelerate in the coming future. Many countries are shifting to trade in their own currencies, an alternative for SWIFT has been discussed, and transactions in metals/oils may stop happening solely in the USD.
On the question of which currency can take the dollar’s share? Your guess is as good as mine. Well, Euro was widely discussed to tip the dollar but the instability in Eurozone in the past reduce its change. A slightly lesser percentage of the Chinese Renminbi is a good candidate to gain share. Russian Rubles could be an interesting entry. I am more inclined towards BRICKS’ common currency for trading. This BRICKS common currency can take a huge share of global trading in the major emerging economies. Other emerging economic blocks in Africa, South America, and Asia may also opt for BRICKS-based currency completely reducing the dominance of the Euro and USD.
One of the biggest benefits of USD is the entire financial architecture built around it. The financial architecture (IMF, World Bank, SWIFT, Petro Dollar, Gold & Metal trading, WTO, Favorable geopolitical environment, etc), which has led to the surge in transactions in dollar over the time, is changing. So any reduction in the usage of the dollar and widespread use of other currencies may take many years.
This discussion is still ongoing and we have to follow the updates in the future to comment on any predictions.
References:
https://www.investopedia.com/articles/markets-economy/090616/5-countries-own-most-us-debt.asp
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124
https://www.investopedia.com/terms/d/dual-currency-bond.asp
https://en.wikipedia.org/wiki/Triffin_dilemma
https://en.wikipedia.org/wiki/Reserve_currency
https://www.investopedia.com/terms/d/dual-currency-bond.asp
https://www.investopedia.com/articles/markets-economy/090616/5-countries-own-most-us-debt.asp
Ankit Khandelwal 