Will the US Dollar Lose Global Dominance?

Will the US Dollar Lose Global Dominance?

2022-04-14 • Updated

The credibility of the US dollar and its banking system depends on the fact that it's considered safe and low-risk. That's why many countries around the world keep their reserves in US banks and hold US bonds in large quantities. However, if the dollar's credibility erodes because of politics, this international monetary and financial system can start collapsing.

The move of the US and its Western allies to freeze most of Russia's foreign exchange reserves has raised fears that the dollar's hegemony is being used as a weapon.

Why is the US dollar at risk?

  1. This kind of abuse of the dollar's dominance would backfire on the US currency. The more the US weaponizes the dollar, the more the international community will be worried that it will be hit with the same weapon in the future. This will prompt the global economy to reassess its dependence on the dollar when it comes to foreign exchange reserves.
  2. Goldman Sachs has warned that the dollar faces risks that may reduce its global dominance, saying some of the challenges are similar to the ones faced by the British pound before it fell from the throne. Once upon a time, the sterling was the largest reserve currency in the world.
  3. The brutal sanctions against Russia are based on the power of the US dollar, which is the most widely-used currency in trade, financial transactions, and central bank reserves. However, by explicitly using the dollar as a weapon, the US and its allies risk provoking a backlash that could undermine the greenback.
  4. The dollar's share of central bank reserves has been declining over the past years. In 2001, the dollar accounted for about 70% of foreign exchange reserves. Now, it is only about 59%, according to the IMF data.

07c500c8-eb39-41ce-9b89-57d2054e9f8f.png

But, why won't the dollar lose its dominance so soon?

There's no real alternative or competitor. The US dollar is the strongest reserve currency in the world. We can argue that the dollar depreciated after the crazy printing of money over the past three years and hot inflation. We can say that the world's confidence in the US as a strong partner is declining increasingly. However, you must have an alternative to exchange dollars. According to history, reserve currencies give way to each other when a more attractive currency comes along. China - today's rising power - has so far shown no reason for the global economy to trust it.

Could another currency replace the dollar?

The euro is the main alternative to the dollar, representing 20% of central banks' reserves. Still, we should be aware of the shift towards smaller currencies such as the Australian dollar, the Korean won, and, above all, the Chinese renminbi.

At the moment, the dollar index is still poised to rise after testing levels above 100. On the upside, the next big target is 103.00. The aggressive tightening cycle of the Fed is also expected to support the dollar in the medium to long term.

Chart 1: The Dollar index is on the rise since the beginning of the Russia - Ukraine war on 24/02/2022, reaching levels above 99.80.

usdollar-d1-fbs-inc-2.png

Chart 2: The dollar's index next target is 103, last seen in 2020.

6edb3875-7710-4c77-948c-55a48f6fa84f.png

 LOG IN

Similar

Bulls Are Coming Back
Bulls Are Coming Back

The US dollar index rose to 105.40 after the Fed’s 75-basis-point key rate hike, while the stock and the crypto markets fell. However, during the past few days, investors and traders returned to risk assets as they expect inflation growth to slow. Moreover, Jerome Powell, the head of the Federal Reserve, announced the Fed might start cutting the key rate by 2024, which is the most evident hint of an upcoming market reversal.

What to Trade on June 20-24?
What to Trade on June 20-24?

Last week was shocking!  The US dollar gained more than 2% against other currencies ahead of the 75-basis points rate hike by the Federal Reserve on Wednesday but dropped after the announcement…

What to Trade on June 13-17?
What to Trade on June 13-17?

Last week was intense!  The US dollar gained more than 2% against other currencies on investors' concerns regarding one more inflation wave in the United States caused by the fuel crisis…

Latest news

What to Trade on July 4-8
What to Trade on July 4-8

Last week was bearish for risky assets such as stocks, oil, gas, and crypto. Will the upcoming week change the situation across the markets? Let’s look at it in detail!

When Will the US Stocks Bear Market Bottom?
When Will the US Stocks Bear Market Bottom?

US stocks have delivered their worst first half of a year in more than 50 years triggered by the Fed's attempt to control inflation and growing concerns about recession.

The Dollar's Strength or Other Currencies' Weakness?
The Dollar's Strength or Other Currencies' Weakness?

The value of the US dollar continues to rise, but is this because of the strength of the dollar itself or just the weakness of the euro, Japanese yen, and British pound? Since the beginning of the year, the US dollar index has been up 8…

Deposit with your local payment systems

Be on top of your game

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

Beginner Forex book

Beginner Forex book will guide you through the world of trading.

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera