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Dollar dominance won’t last forever

A 100 yuan banknote (R) is placed next to $100 banknotes in this picture illustration taken in Beijing Nov. 1, 2010.Reuters/Petar Kujundzic

The dollar’s dominance in financial markets won’t last forever, Paul Krugman said.

But fears that the dollar will be replaced anytime soon are largely unfounded.

According to the economist, there are no better alternatives to the US currency at the moment.

The dollar’s status as the top global reserve currency isn’t going to last forever – but fears of immediate de-dollarization are largely unfounded, according to Nobel laureate Paul Krugman.

‘The greenback’s dominance won’t last forever, because nothing does,” Krugman said in an op-ed for the New York Times on Friday. “But the hype about de-dollarization is much ado about almost nothing. For now, the dollar dominates because there just aren’t any good alternatives,” he added.

Other market commentators have warned that the dollar could soon be replaced as the world’s top reserve currency by a rival, as some nations look to shift away from the use of the greenback in the aftermath of Russian sanctions. Russia, China, and other BRICS nations have made efforts to use alternative currencies to the dollar in trade and in foreign reserves, and have even floated developing new reserve currencies to challenge the greenback.

But those challenges are largely harmless, Krugman said. Besides the dollar, the top-used currencies in foreign reserves and trade are largely held by US allies, who have also backed sanctions against Russia.

And though the dollar’s share of foreign reserve has declined from 71% in 2000 to 58% in 2022, much of its share has been taken up by smaller currencies like the Canadian and Australian dollar, Krugman said, and the greenback is still widely used in global trade. The dollar is used in one side in seven out of eight foreign exchange transactions, per Fed data.

That dwarfs the use other currencies. China’s yuan, for instance, is just 2% of foreign reserves and was part of 7% foreign exchange transactions last year, according to International Monetary Fund and Bank for International Settlements data. Additionally, most people doing business internationally speak English and use dollars, Krugman said, which is likely to discourage the use of the yuan in global trade.

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The dollar also has some advantages over rivals by being the incumbent dominant currency in financial markets, which boosts its liquidity. China’s yuan, meanwhile, is limited by capital controls, which decreases liquidity and makes it less attractive to potential holders.

“Who will want to hold lots of assets when they never know whether they’ll be able to withdraw them as needed?” Krugman said. “And for that matter, while you might want to learn Mandarin to do business in China, how much business do you want to do in a country that seems increasingly willing to arrest foreigners on charges of espionage?”

Other economists have agreed that de-dollarization fears are largely a myth, though the dollar’s dominance could potentially be replaced by a rival decades from now. But even then, that would hardly be catastrophic for the US economy and stocks, experts told Insider, since de-dollarization is largely reflected on the balance sheets of foreign banks, which are disconnected from the US financial ecosystem.

Read the original article on Business Insider


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