Amid widespread speculation that the US dollar will lose its dominant role as the world's number one currency, an American academic says that the dollar is still the global reserve currency, and is stronger than ever before, and will remain so for many years.
In an article in the Washington Post, Mark Kopilovich, professor of political science and public affairs and director of European studies at the University of Wisconsin, says that such speculation spreads a lot at the time of major changes, crises, wars and disasters.
It spread when US President Joe Biden took office, when the “Covid-19” pandemic spread, when the United States imposed sanctions on Russia after its seizure of Crimea, during the financial crisis in 2009, and now because of the war in Ukraine.
The writer explained that the dollar has not lost the status of a reserve currency, and reserve currencies are the currencies held by governments, central banks, and private institutions on a large scale to conduct international trade and financial transactions, and the dollar shares this distinction with only a few other major currencies, including the euro and the yen. Japanese, Swiss franc, British pound, Canadian dollar, Australian dollar and Chinese renminbi.
He stressed that the dollar's status as the dominant global reserve currency, is now stronger than ever and has become more entrenched in the wake of the coronavirus pandemic and economic crisis.
dominant currency
Kopilovich went on to say that the dollar is not only a global reserve currency, but the dominant global reserve currency. In 2019, 62% of the official foreign exchange reserves of the government/central bank were in dollars worldwide, the euro came second in the ranking at 20%, and the Japanese yen In third place is at 5%, the British pound is at 4.5%, and all other currencies, including the Chinese renminbi, are all less than 2%.
He added that the report of the Bank for International Settlements for the year 2020, recorded the dominance of the dollar in several dimensions;
Almost half of cross-border bank loans are denominated in dollars, only a third of them in euros, with loans in other currencies representing less than 20%, but it is slightly less dominant in areas of the global economy such as debt securities, commercial invoices and payments using the financial messaging system (SWIFT). Nearly 90% of forex trading involves the dollar on one side of the transaction.
Simply put, the writer says that the global economy operates in dollars, this has been true for decades, despite repeated predictions of imminent change, and here are 5 decades that have passed since the terrible predictions of the demise of the dollar, dating back to at least 1971, when the former American president ended Richard Nixon the possibility of turning the dollar into gold.
However, every time there is a crisis like the pandemic or the Ukraine war, people claim that this time is different, but we have seen how the pandemic has centralized the dollar rather than weakening it.
Likewise, the rapid and near-complete financial isolation of Russia by the G7 demonstrated the combined dominance of the dollar and the euro as the world's two major reserve currencies.
The dollar continues
The writer pointed out that dollar pessimists ignore the deep and solid foundations of dollar dominance, such as the size of the American economy, the deep and unparalleled private financial markets and the strong protection of property rights in the United States, because America is much more willing than the European Union, China or Japan to act as a haven Finally, for lending in global financial crises, the hierarchical network structure deeply embedded in the global monetary and financial system.
He said that no other country enjoys these advantages, and no other currency is willing to fill these roles, the European Union is the largest economy in the world, but the eurozone is neither a financial nor a political union, and this makes it difficult to convince others that they can rely on the euro at times. Difficult, China is on the rise, and the renminbi is slowly turning into a global reserve currency, however, China still lacks deep and liquid private financial markets, does not allow free flows of capital, and its rulers have shown no sign whatsoever that they will accept the necessary renminbi-economic-political trade-offs To challenge the dollar, or even the euro.
Kopilovich concluded his article that there may come a day when the dollar loses its central role as the dominant global reserve currency, but it is not today, but not even this decade, and it is very likely that it will not be this century, and it will not become possible until the European Union becomes a real financial and political union, Or until China develops a liberal, accountable government and more developed private financial markets that eventually accepts free movement of capital flows, neither of these scenarios seem likely to happen soon.