The U.S. dollar’s position as the world’s reserve currency is weakening, according to a top economist at S&P Global.
“(The U.S. dollar) doesn’t have quite the pull it used to,” said Paul Gruenwald of S&P Global at a conference in London.
“(It) will continue to be a leading world currency, (but) it will no longer be the dominant world currency.”
Gruenwald is not the only economist who expects a decline in the dominance of the greenback. Nobel laureate and economist Paul Krugman recently expressed his belief in an op-ed for the New York Times that the currency’s enduring dominance would eventually fade away.
However, he clarified that while the U.S. dollar’s dominance may weaken, he did not expect it to be replaced as the world’s primary currency anytime soon.
“The hype about de-dollarization is much ado about almost nothing. For now, the dollar dominates because there just aren’t any good alternatives,” Krugman said.
Gruenwald’s evaluation coincided with a global trend where countries look for alternative currencies for trade due to extensive sanctions imposed on Russia in the wake of its invasion of Ukraine, resulting in its exclusion from the U.S. dollar-dominated global financial system.
In the fourth quarter of 2021, the U.S. dollar’s portion of global foreign exchange reserves dropped to less than 60 percent.
Moreover, despite still representing the majority share, accounting for 54 percent of global foreign exchange reserves in the fourth quarter of 2022, data from the International Monetary Fund (IMF) show a decline in the dollar’s proportion of the overall foreign reserve allocation.
“The dollar has not become more dominant. It has not even maintained the dominance of prior years,” economists Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell wrote for an IMF working paper.
Yuan challenging U.S. dollar’s dominance
Nevertheless, according to a report by Insider’s Jennifer Sor on May 6, there is no indication of the U.S. dollar’s dominance waning soon, mainly due to the currency’s crucial role within the global economy.
According to a 2022 survey by the Bank of International Settlements, the dollar’s dominance on the world’s financial system is so overwhelming that it accounts for almost 90 percent of global foreign currency transactions.
This doesn’t stop strategic competitors like China from challenging the U.S. dollar’s dominance.
The Chinese yuan has proven to be the most prominent contender to the U.S. dollar, as Beijing has made repeated efforts to expand the international acceptance of its currency over the years.
Russia and emerging economies like Argentina have started using the Chinese yuan as their preferred currency for trade. Notably, China has been using its currency to purchase most of its oil imports from Russia.
“It’s clear from the moves China is making, like paying for almost all Russian oil imports in yuan or working with Brazil for yuan-denominated trade, that China does not want its currency to remain domestic,” said Abishur Prakash, the head of The Geopolitical Business.
Additionally, alternative currencies such as the Swedish krona, the South Korean won and the Australian and Canadian dollars have been slowly reducing the market share of the U.S. dollar as well.