The dollar’s dominance as a reserve currency is not immediately in question – while the most formidable threat to its status as the world’s leading reserve currency is actually the US economy itself.
The dollar is the most widely used currency in the world both in trade and in central bank reserves — and will likely remain so, as usage of the dollar far exceeds that of other currencies. The dollar accounted for 88% of all daily global trade, according to the latest survey by the Bank for International Settlements.
Meanwhile, it accounted for about 55% of all reserves at central banks in the third quarter of 2023, far more than any other foreign currency, International Monetary Fund data shows.
The BRICS currency
But a rival currency could soon replace the dollar. The BRICS nations are already making efforts to phase the dollar out of trade, while countries such as Russia and China have proposed creating a new currency to challenge the greenback.
But these threats are actually very tame compared to the threat to the dollar coming from the US economy itself, given the risk of a “severe deterioration” in the US financial and economic situation.
Given political polarization, congressional dysfunction, and the indifference of politicians on all sides to contain the widening US budget deficit, the almost unthinkable scenario of the possible dethronement of the dollar is no longer so unthinkable. And if the result is a sustained rise in inflation, the crowding out of private investment, increased financial instability and a reduction in the dynamism of the US economy, then the loss of dollar dominance would be the least of the evils that could happen.
The new blocks
Another danger stems from the fragmentation of world economies into separate blocs under another form of globalization. In this case, global trade, productivity and economic growth would likely be depressed, and the implications for international politics and geopolitical stability would also be adverse.
On the other hand, the precarious fiscal situation of the US could jeopardize the dollar’s leading position in global markets. The federal budget deficit is on pace to reach $1.6 billion this year and $2.6 trillion ten years from now, according to a projection from the Congressional Budget Office.
