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Can the dollar's dominance over the world end, and when and by whom?

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Can the dollar's dominance over the world end, and when and by whom?
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      The idea of the dollar's dominance ending is a complex and frequently discussed topic. While a sudden collapse is unlikely, a gradual erosion of its preeminence over decades is plausible, and it wouldn't necessarily be replaced by a single currency. How could the dollar's dominance end? The dollar'sRead more

      The idea of the dollar’s dominance ending is a complex and frequently discussed topic. While a sudden collapse is unlikely, a gradual erosion of its preeminence over decades is plausible, and it wouldn’t necessarily be replaced by a single currency.

      How could the dollar’s dominance end?

      The dollar’s dominance rests on several pillars:

      1. Size and Stability of the US Economy: The US remains the world’s largest economy with a strong rule of law and predictable institutions.
      2. Depth and Liquidity of US Financial Markets: US Treasury markets are the deepest and most liquid in the world, offering unparalleled safety and ease of transaction for global investors.
      3. Network Effects: The dollar is deeply embedded in global trade, finance, and central bank reserves. This inertia makes it costly and difficult for others to switch.
      4. Absence of a Credible Alternative: No other currency currently possesses all the attributes of the dollar.

      For the dollar’s dominance to truly end, a combination of factors would likely need to occur:

      • Continued “Weaponization” of the Dollar: If the US continues to use sanctions and financial restrictions frequently, it will accelerate the search for alternatives, as countries seek to reduce their vulnerability.
      • Persistent US Fiscal and Debt Concerns: A sustained loss of confidence in the US government’s ability to manage its debt and deficits could erode trust in the dollar’s long-term stability.
      • Decline in US Economic Competitiveness: A significant and sustained decline in the relative size and dynamism of the US economy compared to other major blocs.
      • Emergence of a Strong, Stable, and Liquid Alternative: This is the most challenging hurdle. A potential replacement would need:
        • A large, stable economy to back it.
        • Deep, liquid, and open financial markets for easy trading and investment.
        • Independent and transparent institutions that inspire global trust.
        • Full convertibility with no capital controls.

      When and by Whom?

      It’s highly unlikely to be a sudden event. Historically, shifts in reserve currencies have been gradual, occurring over decades. The British pound’s decline and the dollar’s ascent took many years, with an “interregnum” where neither was fully dominant.

      Here’s a breakdown of potential scenarios and contenders:

      • Gradual Multipolarity (Most Likely): Instead of a single replacement, the world could move towards a more multipolar currency system. This means:
        • The Euro: Already the second-largest reserve currency. Its main challenges are political fragmentation within the Eurozone and the lack of a fully integrated capital market. However, efforts to strengthen European financial integration could boost its role.
        • The Chinese Renminbi (Yuan): China’s economic size is immense, and it’s actively promoting the yuan’s internationalization through trade agreements, swap lines, and its digital currency (e-CNY). However, its major hurdles are capital controls, lack of full convertibility, limited transparency of its financial markets, and concerns about the rule of law. If China were to significantly liberalize its financial system and address these issues, the yuan’s role could grow considerably.
        • A Basket of Currencies / SDRs: Some propose a system based on the IMF’s Special Drawing Rights (SDRs), which is a basket of major currencies (currently including the dollar, euro, yuan, yen, and pound). This could offer a more stable alternative, but it would require significant international cooperation and agreement.
        • Other Currencies: Smaller, stable economies with strong fundamentals, like the Japanese Yen, British Pound, Canadian Dollar, or even the Norwegian Krone, could see increased roles as reserve assets, but are unlikely to challenge the dollar’s overall dominance alone due to the relative size of their economies and financial markets.
        • Gold and Commodities: A return to commodity-backed currencies is generally seen as impractical for a modern global economy. However, central banks are increasing their gold reserves, suggesting a desire for diversification away from fiat currencies.
      • Accelerated Decline (Less Likely, but Possible): A rapid decline could be triggered by a severe and prolonged US economic crisis, a loss of confidence in US political stability, or a series of policy missteps that actively undermine the dollar’s credibility. In such a scenario, the transition could be more disruptive.

      Timeline:

      Most analysts suggest that any significant shift in the dollar’s dominance would unfold over decades, not years. The dollar’s share in global foreign exchange reserves has slowly declined from over 70% in 2000 to around 58% in 2024, indicating a very gradual trend.

      In summary, the dollar’s dominance is not immutable, and forces are at play that could gradually erode it. However, a complete and rapid replacement by a single other currency is highly improbable in the foreseeable future. A more likely outcome is a multipolar currency system where several currencies play significant international roles, with the dollar potentially retaining a leading, though less overwhelming, position.

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