Dollar’s dominance under threat?

March 30, 2023 (MLN): The US dollar has been the undisputed king of the global financial system for decades, but the emergence of a new world order will likely end the US dollar’s decades-long dominance.

The dollar is America's last surviving superpower. The world's second-largest economy and its largest energy exporter are together actively trying to dent the dollar's dominance as the anchor of the international financial system. Will they succeed?

Can an alternative currency like the yuan become the new reserve currency of the world?

During the recent summit, Russian President Vladimir Putin and Chinese President Xi Jinping expressed their interest in using the Chinese Yuan as a settlement currency between Russia and countries in Asia, Africa, and Latin America, marking a significant move to challenge the US dollar's dominance as the anchor of the international financial system.

The two countries are actively seeking to diversify away from the dollar, with both central banks holding less of their reserves in dollars, and most trade between them being settled in the Yuan.

Russia-Ukraine tensions started to escalate in early to mid-2022, and the US dollar index (DXY), which measures the value of the dollar against a basket of six major currencies, began to decline in September 2022 after reaching a peak of 114.78, down by 10.54% to 102.62 as of today, with no signs of relief.

The Russian Rubble rebounded in March 2022 amid Russia-Ukraine tensions after a long slump, but its rally was brief and it fell back to its previous range prior to crashing, by December of the same year, as shown in the RUBUSD weekly time frame chart below.

The Chinese yuan’s rally against the dollar was also short-lived, as shown in the CNYUSD daily time frame chart below.

On the other hand, the euro gained strength against the dollar during the same time, starting from September 2022, as shown in the USDEUR daily time frame chart below.

How long can the Dollar maintain its status as the world’s reserve currency? Will the euro or the yuan challenge its supremacy?

Former Assistant Treasury Secretary Monica Crowley warned that this would have catastrophic consequences for the American economic system.

Crowley indicated that Saudi Arabia's decision to trade oil in different currencies could be the tipping point.

Biden’s coalition against Russia keeps the dollar strong, but its global share is declining. China’s Yuan fails to compete, but Saudi Arabia may use it for oil. India and Russia avoid dollars for the oil trade. Meanwhile, China has launched digital currency.

This move faced strong resistance from the European Union. The European Commission’s ex-president, Jean-Claude Juncker, called for strengthening the euro’s role internationally to protect the continent from what he termed as selfish unilateralism.

Fareed Zakaria, the author of The Global Public Square, stated on CNN live that while there is no single alternative to the dollar, the currency could face gradual erosion by multiple factors.

He warned that the rising public debt of the US and the Fed’s expansive monetary policy could pose risks to the dollar’s stability and strength if its dominance were to diminish.

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