Even exorbitant privileges can be lost and there are a number of factors suggesting that, over time, the US dollar may be at risk of surrendering its lead, if not its role, as the world’s preeminent reserve currency.
Some of these factors relate to U.S. policy decisions, others to policy decisions and developments elsewhere, but all point in the same direction. The primary reasons for the dollar’s continued dominance are inertia and the lack of viable alternatives, neither of which U.S. policymakers should find comforting for the longer term.
The most obvious U.S. policy contributions to a diminished role for the dollar are from economic sanctions and protectionist trade initiatives. All else equal, protectionist policies divert trade away from the U.S., and may induce new trade partners to settle in currencies other than the dollar.
Sanctions do the same, and since they may effectively preclude dollar settlement, the implications for the dollar are more acute. In addition to the Treasury Department’s list of 6,300 Specially Designated Nationals and more than 20 countries against which some type of sanctions are in place, the extraterritoriality of certain sanctions to affect persons and entities in other jurisdictions extends their reach further.
Competition from abroad
While U.S. policies have clearly pushed some countries, such as Iran and Russia, away from the dollar, officials in China and the euro zone have been actively touting their currencies as reserve and transaction substitutes.
The Chinese renminbi was added to the International Monetary Fund’s Special Drawing Rights basket in 2016, joining the dollar, euro, yen and British pound, in a development the Fund said “enhances the attractiveness of the RMB as an international reserve asset.” The renminbi was introduced as a numeraire in commodity markets in 2018 when crude oil futures began trading in the Shanghai International Energy Exchange.
A number of European officials have talked up the role of the euro, with European Commission President Jean-Claude Juncker telling the European Parliament in his 2018 annual program address that it is “absurd” that 80% of European energy imports are settled in dollars. France, Germany and the U.K. set up the Instrument in Support of Trade Exchanges (INSTEX) earlier this year to work around U.S. sanctions on Iran, and while it may be more politically symbolic than economically effective, INSTEX confirms that even allies will seek dollar alternatives if policy differences with the U.S. cannot be bridged.
Read the full article at CNBC: The risks are rising that the dollar could lose its special global standing | CNBC