Key Takeaways
The US dollar is the dominant currency in global trade and finance, far exceeding the US’ share of global GDP, trade or banking. However, policymakers in other economies are increasingly looking to alternatives for economic and political reasons.
Russia and China are leading these efforts, with an eye on the dollar’s use in goods trade and alternative payments systems also being promoted.
These policy efforts, the dollar’s declining share of FX reserves, and the rise of central bank digital currencies could potentially signal that the currency’s position is under threat.
However, it is hard to see a shift away from the dollar as the dominant currency any time soon. Currency trading embeds a strong triangulation effect that reinforces the USD’s deep & liquid FX markets. Demand for US assets remains strong, morphing from FX reserves to sovereign wealth funds.
The Chinese renminbi may continue to gain traction in trade flows, but capital controls and geopolitical tensions imply that it is still a long way short of becoming a viable alternative. The major policy shifts required to truly internationalise the RMB increasingly seem at odds with other priorities.
Indeed, the factors that strengthen the dollar’s position, such as capital market openness, institutional quality, rule of law, and its established use as a currency of transaction, are hard to replicate.
As such, we expect the dollar to maintain its unique role, even if we see some greater diversification regarding currencies used for trade and FX reserves over the coming years.