Is the US dollar in danger as the main universal trade currency?

May 14, 2023 - 23:14
Is the US dollar in danger as the main universal trade currency?
Image by Gerd Altmann / Pixabay

Despite the cyclical crises it has been through, the U.S. dollar continues to be the currency par excellence for commercial transactions around the world. But this exclusivity could end soon, with the rise of emerging economies, especially China - which holds most of the US external debt.

In our days the U.S. dollar remains the dominant global reserve currency and the primary currency used for international trade transactions. Its status as the world's main universal trade currency has been well-established since the end of World War II, largely due to several key factors:

  1. Size of the U.S. Economy: The United States has one of the largest and most influential economies in the world. Its GDP is substantial, and it plays a critical role in global trade and finance.

  2. Stability and Security: The U.S. economy and financial system are considered relatively stable, and the U.S. government has a history of meeting its debt obligations. This stability has contributed to the confidence in the U.S. dollar as a safe and reliable store of value.

  3. Petroleum Pricing: The petrodollar system, established in the 1970s, means that oil is primarily priced and traded in U.S. dollars. This has created a significant global demand for dollars, as countries need them to purchase oil.

  4. Financial Markets and Infrastructure: The U.S. hosts some of the world's most important financial markets and institutions, including the New York Stock Exchange (NYSE) and the Federal Reserve. These institutions, along with the ease of dollar-denominated transactions, contribute to the dollar's prominence.

  5. Global Trade Practices: Many international trade contracts are denominated in U.S. dollars, which has become a standard practice in global trade over the years.

However, the global economic landscape is constantly evolving, and there are factors that could potentially challenge the U.S. dollar's dominance as the main universal trade currency in the future:

  1. Rise of Other Currencies: As economies in emerging markets, such as China and India, continue to grow, their currencies (the Chinese Yuan and the Indian Rupee) could gain more prominence in global trade and finance.

  2. Currency Wars: Economic and political tensions between nations could lead to increased efforts to diversify away from the U.S. dollar, as some countries might seek alternatives to reduce their dependence on the U.S.

  3. Technological Disruption: Advancements in financial technology and the rise of digital currencies, including central bank digital currencies (CBDCs), could reshape the global financial landscape.

  4. Geopolitical Shifts: Changes in global power dynamics and geopolitical events could impact the role of the U.S. dollar in international trade and finance.

It's important to note that any shift away from the U.S. dollar as the main universal trade currency would likely happen gradually and would depend on various complex economic, political, and technological factors. The U.S. dollar's status as the global reserve currency is deeply entrenched, and any significant changes would require considerable time and effort by other nations and economic actors.

Vincent Taylor EA Global Coordinator