Since the end of WorldWar II, the global financial system has been revolving around the US dollar. The Bretton Woods Agreement, signed in 1944, standardized the US dollar to unchallenged hegemony. Today, several economic experts believe that the greenback’s domination is on its decline.
America’s decrease in share in the global trade, China monetary expansion with full might, centralized and decentralized cryptocurrencies, and the expected digitization of currencies are factors threatening the dominance of the greenback.
The US government has been exploiting its position of being able to mint the globally-centered currency for a long time. It gives the US a huge advantage over other world economies. The US pays for imports with its domestic currency and has no balance of payments problems. It faces no hassles to finance its deficit account.
The country has been able to overspend for decades now because of the dollar’s strength. As the demand for dollar liquidity in the global banking system is endless, the US gets access to cheap credits. Other than benefiting itself, the US can also leverage the greenback’s dominance to deny rebel nations’ access to the financial order.
The Trump administration has moved against adversary countries like China and Iran by ramping up financial sanctions against them. However, many experts believe that exploiting the dollar’s position to inflict economic damage to adversary countries can have serious economic repercussions. Dissatisfied nations like Russia and China are in the pursuit of the de-dollarization of their economies.
It’s also true that no nation will opt for an alternative medium of exchange if it can’t match the efficiency gains of the old system. The imminent rise of CBDCs could threaten the dollar’s hegemony as they could provide a more convenient system. Market observers believe that China can be a potential threat to the greenback’s power if they can leverage the utility of its digital currency framework and its extensive economic influence.
Many financial pundits also are considering a situatn where a common global cryptocurrency gets developed. Decentralized currencies like Bitcoin and Ethereum can also be accepted by economies as foreign reserves in the future.
The problem with the dominance of any country’s currency in the financial market is that the nation in control can always leverage its position. The only way to disarm a country from weaponizing its position in the financial system is to switch to a politically unprejudiced currency. Many believe that the US-China political standoff can lead to the development of a neutral solution.
Bitcoin’s algorithmically limited supply and its concentration among a few quadrillionaires are some of the hurdles that Bitcoin faces in its getting accepted as the reserve currency. It may also be possible that the development of multiple greenback substitutes leads to an agreement where no single currency holds the hegemonic position.
An opinion resonating with most financial experts is that Bitcoin has the best shot at ousting the US dollar from its dominance status. USD is still the ruler of the world’s financial order, and only time will tell if digital currencies can displace it from its hegemony.