For decades, the international expert community has been discussing the privileged position of the U.S. Dollar in the international currency market. Some experts predict that the dollar is likely to lose its stability as a global currency.
In the 19th century, when the British Empire was flourishing, the British Pound was the key global currency. In 1944, the U.S. Dollar officially ousted the British Pound and became the key global currency instead. The thing is, the British Empire was heavily damaged in WWII. The U.S. Dollar has been dominating the entire global financial system since then.
Still, the status of the dollar is now questioned, and it depends on the USA’s power as well as the status of the currency that wants to oust the dollar. This is what Stratfor experts think on the matter. On top of that, they have conducted research on the current status of the U.S. Dollar as well as its possible changes.
Guaranteed international demand for the national currency gives the central bank more freedom in terms of defining the amount of the emission, and a wider environment using the currency can absorb the inflation. The privileged status means that the country can run the deficit. On the other hand, the global market makes the country vulnerable to the negative factors outside.
The global reserve currency status is backed by 2 things – faith and inertia. Apparently, a global reserve currency should be the world’s safest asset by default. This means that the stability of the U.S. Dollar decreases as investors start losing faith in this asset being safe. If there are difficulties, this is where inertia comes in. This happens since most central banks around the world store a certain share of their foreign currency reserves in this currency. In order to destroy this mighty power, an even stronger power source is needed (like the last 2 world wars), or changes taking place over a pretty long period of time.
Those who lend to a private company often put up with investment losses in case the company faces a corporate default. In the USA, the risk is smoothened by the 14th amendment to the Constitution. In particular, this is what Section 4 of the amendment says:
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
Another way to reduce the debt is inflation. The US public debt is denominated in dollars, which means that in theory the Federal Reserve may increase the emission of money to service the debt. Even though President Trump hasn’t mentioned this specific way, this is still technically possible. In this particular case, we should keep in mind that Trump’s administration can influence the Fed by means of several appointments planned for the next couple of years.
How real is abandoning the dollar?
Given the existing preconditions, investors should seriously take into account the possibility of the U.S. Dollar turning into a less secure asset over the next couple of years. Those who consider abandoning the dollar, should pay closer attention to studying the prospects carried by alternative currencies. At this point, there exist several potential successors to the dollars as the world’s major reserve currency:
The Euro. This is the world’s second-biggest reserve currency. Back in 1999, when the common currency came into existence, some experts predicted that by 2015 it should have taken the lead. However, that scenario didn’t manifest itself. On top of that, the disputes and distinctions between the Eurozone members are getting more and more vivid. The real state of affairs is far from what it should be. Investors don’t believe in the Euro and are afraid that the Eurozone may collapse anytime.
The Japanese Yen. This currency is number 3 on Stratfor’s list of potential global reserve currencies. However, Japan has been seeing a prolonged economic crisis coupled with demographic challenges seen over the last few years. The population has been aging like never before, thereby creating problems for the future of the national economy. That’s why the Japanese Yen is unlikely to oust the U.S. Dollar in the near future.
The Chinese Yuan (also known as the Renminbi). Over the last couple of years, the Chinese Yuan has indeed made considerable progress as a regional currency. China has been creating an entire infrastructure to make it an international currency. Still, few traders and investors are taking those ambitions seriously, even though it was added to the IMF’s currency basket. The thing is, the Renminbi now makes up for just 4% of the international transactions, while the local government still can interfere with the CNY exchange rate.
A whole new type of currency. When it comes to new currencies, we are talking about international currencies, which can be split in 2 categories: the special drawing rights (SRDs) by the International Monetary Fund and crypto-currencies led Bitcoin.
