Signs point to potential crisis for the US currency

Signs point to potential crisis for the US currency

The global financial landscape is undergoing a significant transformation, with the U.S. dollar's status as the world's primary reserve currency being questioned. Geoffrey Yu, senior EMEA markets strategist at BNY, argues that other currencies must earn their way to higher status, while Jens Søndergaard, currency analyst at Capital Group, poses the dilemma of whether the U.S. still wants to lead, and if the world trusts it to do so.

Several potential alternatives to the U.S. dollar have been proposed, including the euro, Japanese yen, Chinese renminbi, IMF special drawing rights (SDRs), cryptocurrencies, and gold. The euro, backed by the EU's economic size and strong central bank, is the second most-used reserve currency. However, its lack of unified fiscal governance and a common treasury limits its appeal as a full alternative.

The Japanese yen, while recognized as a reserve currency, holds a smaller share globally and faces similar limitations to other smaller currencies in scale and market depth. The Chinese renminbi is a growing player, but it is hindered by capital controls, limited financial market depth, and transparency concerns that prevent it from becoming a widely trusted reserve currency.

IMF special drawing rights (SDRs), based on a basket of major currencies, have been proposed as a global reserve alternative to the dollar. However, they represent a very small portion of global reserves and lack the infrastructure for widespread adoption.

Digital assets and cryptocurrencies are often discussed as potential future global reserve currencies due to their decentralized nature. However, they currently face significant challenges such as high volatility, insufficient scale, regulatory uncertainty, and lack of sovereign backing.

Gold, another traditional alternative, is valued for its intrinsic worth, but it lacks the liquidity and convenience of modern currency systems, limiting its role as an operational global reserve currency. Some countries and central banks have increased gold holdings as a diversification strategy amid perceptions of dollar weakening, but it is considered a complement rather than a substitute.

Despite these pressures for de-dollarization, including demands from geopolitical blocs like BRICS for trade in their own currencies, the dollar’s extensive financial infrastructure, liquidity, and network effects sustain its preeminent global reserve status. Experts argue that viable alternatives require not just economic size but also monetary cohesion, transparency, and deep, trusted financial markets, which few if any alternatives currently possess.

Jesper Koll, global ambassador and expert director, Monex Group, Japan, suggests that Japan's weaker yen, shifting geostrategic dynamics, and a more confident domestic leadership are putting Japan back in the spotlight, making it an alternative to the U.S.

The focus is shifting towards managing the risks around the dollar more deliberately and being prepared for what might come next, without necessarily abandoning the dollar. Mark Sobel, US chair at OMFIF, cautions against writing off the dollar too quickly, suggesting that short-term market movements are being mistaken for structural change. Yara Aziz, Senior Economist at OMFIF, states that the assumptions that once underpinned the dollar's dominance can no longer be taken for granted, and that resilience is being redefined, shifting the focus towards alternatives.

The OMFIF Bulletin's latest edition examines the reassessment of allocation strategies due to trends driving a re-evaluation of the dollar's dominance in global finance. Christopher Smart, managing partner of Arbroath Group, views digital assets as a geopolitical risk accelerant, intersecting with political populism and weakening trust in institutions, particularly in the U.S. Pierpaolo Benigno, professor of monetary economics at the University of Bern, and Edoardo Reviglio, visiting senior research scholar at Yale Law School, argue that the debate is no longer about whether a European safe asset is needed, but whether the European Union is prepared to deliver one - and on what terms.

Aaron Hurd, senior portfolio manager at State Street Investment Management, argues that the era of high returns from unhedged dollar exposure is over. Michael Paulus, head of public sector banking, Asia, Alberto Torres, head of public sector banking, LATAM, Sunil Kaushik, head of precious metals solutions, APAC, Natalie Tsui and Tobias Cheung, public sector banking, Asia at Citi, explain that gold has reclaimed its role as a core reserve asset, due to its independence from any single sovereign and its reliability as a hedge against volatility and geopolitical risk.

In conclusion, while the dollar's dominance is being challenged, it still leads, but the world is no longer following without question. The search for viable alternatives is ongoing, with experts agreeing that these alternatives require not just economic size but also monetary cohesion, transparency, and deep, trusted financial markets.

1. The shift in the global financial landscape has led experts to discuss viable alternatives to the U.S. dollar as the world's primary reserve currency, such as the euro, Japanese yen, Chinese renminbi, IMF special drawing rights (SDRs), cryptocurrencies, gold, and others.
2. The euro, although it is the second most-used reserve currency, faces limitations due to its lack of unified fiscal governance and a common treasury.
3. The Chinese renminbi, while growing in influence, is hindered by capital controls, limited financial market depth, and transparency concerns, preventing it from becoming a widely trusted reserve currency.
4. IMF special drawing rights (SDRs), based on a basket of major currencies, have been proposed as a global reserve alternative but lack the infrastructure for widespread adoption and represent a very small portion of global reserves.
5. Gold, while valued for its intrinsic worth, lacks the liquidity and convenience of modern currency systems, limiting its role as an operational global reserve currency.
6. Digital assets and cryptocurrencies, valued for their decentralized nature, face significant challenges such as high volatility, insufficient scale, regulatory uncertainty, and lack of sovereign backing.
7. Experts argue that viable alternatives require not just economic size but also monetary cohesion, transparency, and deep, trusted financial markets, which few if any alternatives currently possess.

Read also: