Is US dollar losing dominance?

Much of the United States’ influence over the world comes from the dominance of its dollar in the global economy. Every country in the world needs US dollars to buy oil. The dollar being the currency of the global oil trade further aids its overpowering influence. And oil is the most traded commodity in the world.

China, Russia, Iran and Venezuela have tried their luck to diminish the dominance of the US dollar — with little success.

However, recent US economy and international incidents are increasingly causing experts to warn of the dollar losing its eminence.

According to a research note from Goldman Sachs, analysts warned that similar obstacles eroded the British pound’s power in the early 1900s and could do the same to the US dollar.

Moreover, IMF’s top official also warned recently of a decrease in the US currency’s dominance in global markets after imposing sanctions on Russia.

America’s debt:

Goldman Sachs warning points to the USA’s deteriorating net foreign asset position, its massive and rising foreign debts, and increased use of other currencies in world trade would cause central banks to diversify away from the dollar.

Moreover, Goldman Sachs warned that sanctions by the US and its allies that froze much of Russia’s foreign-currency reserves have raised concerns that other countries could grow wary about relying heavily on the dollar.

The Treasury Department February this year reported that the total national debt of the US surpassed $30 trillion for the first time in history, an amount equal to nearly 130 percent of America’s GDP.

The eye-popping figure makes the US one of the most heavily indebted nations in the world, said a VOA report.

At the end of 2019, prior to the pandemic, the national debt stood at $22.7 trillion. One year later, it had risen by an additional $5 trillion, to $27.7 trillion. Since then, the nation has added more than $2 trillion in further debt.

The $30 trillion in outstanding debt is owed to a wide variety of creditors, including foreign governments. As of the most recent data available, Japan was the largest foreign holder of US debt, with $1.3 trillion. China was the second-largest with $1.1 trillion, while the United Kingdom was in distant third place, with $622 billion.

With a ratio of 133 percent, the US is the 12th most indebted country overall, and the fourth most indebted among the developed economies that make up the Organization for Economic Co-operation and Development. The OECD average is an 80 percent debt-to-GDP ratio.

International front:

After the financial sanctions imposed on Russia, Gita Gopinath, first deputy managing director of IMF, recently warned that the move could cause a more fragmented international monetary system.

However, Gopinath said the dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible

According to a recent IMF report on dollar dominance in global markets, “the share of reserves held in US dollars by central banks has dropped by 12 percentage points since the turn of the century, from 71 percent in 1999 to 59 percent in 2021.”

IMF sees the active portfolio diversification by central bank reserve managers as the main reason for this decline. 

The share of nontraditional reserve currencies, defined as currencies other than the US dollar, euro, Japanese yen and British pound sterling, rose from negligible levels at the turn of the century to roughly $1.2 trillion and 10 percent of total identified reserves in 2021.

Moreover, Dow Jones recently reported that Saudi Arabia, the world’s largest exporter of crude oil, is in active talks with China, the world’s largest importer of oil, to price some of its oil sales to China in yuan.

Bloomberg has also reported that India is set to buy Russian oil at discounted prices, using yuan. The report added to speculation of expanded global use of yuan in commodity trades, as it benefits from an accelerated move away from the US dollar in the wake of the Russia-Ukraine war.