Worldwide Currency: We’re Number 1
Since the end of World War II, the US dollar has been the most influential and significant currency in the world. There are, however, challenges to the dollar’s supremacy. Keith Rockwell, former chief spokesman for the World Trade Organization, sees three challenges:
“The most direct threat comes from a growing group of emerging countries that resent Washington’s weaponization of the dollar on global markets and payment networks. A second threat arises from technology, as central banks around the world work to develop their own digital currency networks. Another threat stems from the possibility that political grandstanding on Capitol Hill over the budget may undermine efforts to raise the debt ceiling and could subsequently lead the U.S. to default on its loans.” .
Political grandstanding was on full display during the 118th Congress. Republicans, holding a slim majority in the House of Representatives and feeling the pressure from its far-right wing, brought the United States to the brink of defaulting on its debt obligations in June 2023. As Rockwell has written, “the mere suggestion that some members of Congress are prepared to make a political point by allowing the nation to default is the kind of thing that rattles investors and shakes global confidence in the US.” The far-right wing faction collected its pound of flesh but the debt ceiling was raised and would not be visited again until after the 2024 presidential election. And in the new 119th Congress, grandstanding, threats and political pressure will undoubtedly be at the forefront.
The dollar dominates as the largest international reserve currency. During the first quarter of 2023, the International Monetary Fund (IMF) reported that 59.02 percent of the world’s official exchange rate reserves were held in US dollars; 19.77 percent were held in Euros; 5.47 percent were held in Japanese Yen; 4.85 percent in UK pounds sterling; and 2.58 percent in Chinese renminbi. In 1999, the share of US dollar assets in central bank reserves was 71 percent, the year the euro was launched; in 2023, the dollar has dropped to 59 percent.
The Chinese renminbi is the world’s fifth-largest payment currency, third-largest trade financing currency, and fifth-largest international reserve currency. While its importance and influence has grown over the past two decades, it has far to go to replace the dollar as the dominant international currency. As Eswar Prasad of Cornell University and the Brookings Institution wrote in 2020, “While the renminbi has the potential to become a significant reserve currency, it is unlikely to attain safe haven status in the absence of far-reaching reforms to China’s institutional and political structures.”
Sources: Keith Rockwell, “An Exorbitant Privilege Now at Risk? The Once (and Future?) Almighty Dollar,” Wilson Center, May 1, 2023, https://www.wilsoncenter.org/article/exorbitant-privilege-now-risk-once-and-future-almighty-dollar; “Currency Composition of Official Foreign Exchange Reserves,” IMF, https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4; Serkan Arslanalp and Chima Simpson-Bell, “US Dollar Share of Global Foreign Exchange Reserves Drops to 25-Year Low,” IMF Blog, May 25, 2021, https://www.imf.org/en/Blogs/Articles/2021/05/05/blog-us-dollar-share-of-global-foreign-exchange-reserves-drops-to-25-year-low; Junhua Zhang, “Prospects of the Yuan Unseating the Dollar,” GIS Reports, August 21, 2023, https://www.gisreportsonline.com/r/yuan-unseating-the-dollar/; Eswar Prasad, “The Renminbi Rises but Will Not Rival the Dollar,” Brookings Institution, October 2020, https://www.brookings.edu/articles/the-renminbi-rises-but-will-not-rival-the-dollar/.
