Link: The Changing Role of the U.S. Dollar / Brookings
TLDR: Whether it’s sanctions overuse, U.S. political dysfunction or crypto-led fintech innovations, the dollar can’t take its preeminence for granted anymore.
Key Points:
- The dollar’s position as the world’s dominant currency makes it central to global reserves, borrowing, payments and trade. This has been a significant benefit to the U.S., which has enjoyed lower borrowing costs and reduced risk of currency crises. However, the dollar’s role as the global currency of choice means it must absorb global savings imbalances and potential upward pressure on the exchange rate.
- The dollar’s share of global reserves has declined from more than 70% in 2000 to 59%, with the drop attributed to rise of “nontraditional” currencies rather than major competitors like the euro or yen.
- On paper, the dollar’s dominance might not be under immediate threat, but one can’t overlook the fact that everyone who has risked the ire of the U.S. has started to look for options. The rise of cryptocurrency and distributed digital money is the big challenge to dollar as the sole intermediary currency.
My Thoughts:
More than military dominance, the U.S. dollar has been the key instrument for America’s global dominance. It remains so, but it will increasingly come under pressure due to digitization and disaggregation of money. This is very much a continuation of the “routing around institutions” trend that has been a hallmark of the internet. My friend Pip Coburn in 2010 described how the internet enables “distribution techniques are shredding old business models” as “routing around institutions.”
The rise of “nontraditional” currencies in global reserves speaks to a desire for higher yields and a hedge against dollar-centric risks. This trend, while gradual, signals a subtle rebalancing of the global financial system. The U.S. faces a delicate balance – maintaining the dollar’s strength while adapting to a world where its role as a “middleman” currency may diminish.
