Dollar to maintain dominance in global markets, says Chamath Palihapitiya

The U.S. dollar will likely maintain its dominance in global forex markets, according to Social Capital founder and CEO Chamath Palihapitiya.

In last week's episode of the "All-In Podcast," Palihapitiya pointed out that the greenback had dominated global forex reserves for decades with minor fluctuations from year to year, making it difficult for a rival currency to challenge the dominance.

"In general, the anchor currency for governments and central banks has been, will be, and will likely be in the future the U.S. dollar," said Palihapitiya.

Other experts have also argued that the fear of the dollar losing its dominance is "unfounded." Earlier this week, analysts at multinational bank JPMorgan also discussed emerging signs of de-dollarization in the global economy.

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According to the International Monetary Fund, the dollar's share in global reserves has hit a record low of 58 percent. The currency's portion in global reserves drops further when accounting for gold, which now represents 15 percent of reserves held by central banks. JPMorgan strategists nevertheless said the dollar would maintain its position as the world's most used currency for the "foreseeable future."

U.S.-based credit rating agency Fitch Solutions also said the dollar's dominance would experience a decline over time, but the market would maintain the perspective of the dollar as a "safe-haven" currency.

Asset manager Eurizon previously said the "erosion" of the dollar's status as a reserve currency had accelerated since the beginning of the Ukraine War. Eurizon, however, affirmed that people would still opt for the U.S. dollar for cross-country transactions.

Rival currency to U.S. dollar

Palihapitiya also talked about the efforts of developing economies like BRICS — Brazil, Russia, India, China and South Africa — to reduce their reliance on the dollar by using alternative currencies. The venture capitalist said these countries were "banking" the greenback "like nobody's business."

The Chinese government has strengthened its relationships with key trading partners, boosting the yuan's use in global trade and forex reserves. For instance, it has established an agreement with Brazil to exclusively trade in their respective currencies instead of the U.S. dollar. Sources also said China is in talks with Saudi Arabia to conduct oil trade in the yuan.

Palihapitiya explained that the yuan was a "proxy dollar" in global markets because China uses its dollar reserves to back its own currency. Unlike some other currencies, however, the yuan is not exclusively pegged to the U.S. dollar. The yuan trades in a two percent range around a midpoint against the dollar, with the rate being fixed daily by the Chinese central bank.

As previously mentioned, Fitch Solutions argued that investors would still consider the dollar a reliable store of value, meaning that people would invest their funds in the dollar in times of economic uncertainty. Kyriba head of market strategist Bob Stark also said the dollar would remain one of the market's primary choices of investment unless there were a "seismic economic shift."

Stark estimated that it would take the dollar more than two decades to lose another 12 percent of its share in global reserves. The strategist said even if that "scenario" took place, the dollar would still outpace other global currencies.

Economists have also discussed the potential impact of the dollar's declining dominance in global markets on the U.S. economy. Several figures, including Tesla CEO Elon Musk, previously raised concerns that the de-dollarization would negatively affect the country's economic situation.

Boston University economics professor Perry Mehrling said the de-dollarization effects would largely happen on the balance sheets of foreign banks, which are not directly linked to the U.S. financial system. This situation can dissuade foreign investors from investing in U.S. markets, but Stark argued that the U.S. could find other sources of funds.