Who could oust the dollar as a global reserve currency?

Who could oust the dollar as a global reserve currency?
Who could oust the dollar as a global reserve currency?
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In the 20th century, the dollar overtook the pound as the world’s reserve currency, becoming widely used as a unit of exchange, a store of value and a means of payment. Now, however, writes The Economist, two technological changes could undermine its role

The most important currency in the world is on the rise. The dollar has risen about 20% over the past year against a basket of global currencies and is at the highest level in the last 20 years. A euro is worth less than a dollar and other claimants to the dollar throne as the world’s reserve currency, such as the yen, yuan or even cryptocurrencies, have collapsed. While America used its financial power to crush Russia, others were quick to resort to the dollar-based financial system as a safe haven. This cyclical dollar strength dominates the global financial landscape.

But on closer inspection, the technological changes that could bring this into question are taking hold.

The rush of the dollar reflects several forces. While Europe and China are facing a period of crisis, the US economy is proving extraordinarily resilient, with jobs and earnings growth still strong. Inflation is high and the Federal Reserve is raising rates faster and higher than other large central banks. Energy crises are terms of trade shocks that favor energy exporters and punish importers’ currencies. Thanks to the shale revolution, America became a net energy exporter in 2019 for the first time since 1952. None of these dynamics seem likely to subside anytime soon. The Economist.

For America, a strong dollar has some advantages. It will help reduce inflation, although it may pose some long-term competitiveness problems. For much of the world, however, it is bad news. The green banknote remains prominent in commercial billing and cross-border debt. As a result, when the Fed raises rates and capital moves to America, emerging market finances are squeezed. Big economies like India have held up well so far, but smaller, heavily indebted countries like Sri Lanka and Pakistan are in dire straits.

The resilience of this dollar-based global system, despite the resentment it arouses, testifies to America’s resilience. It has gone through tough times over the past 15 years, with a financial crisis, a poorly managed pandemic, a growing fiscal deficit and a constitutional crisis in 2021. However, even as the dollar has soared, two technological developments deserve great attention.

First, new state-run digital currency and payment systems are gaining ground. China’s e-yuan now has 260 million users and the technology used could allow China to manage its global payments network while maintaining capital controls, which it considers necessary to maintain stability. This could make it virtually immune to US sanctions. Elsewhere, state payment systems are showing powerful network effects. India’s UPI system is vast, and Brazil’s payment system, Pix, has been used by 126 million people. Today these payment networks are national; tomorrow they could facilitate cross-border transactions as an alternative to the dollar-based system.

Second, if you look beyond cryptocurrency scams and bubbles, decentralized finance technologies continue to improve. The developers are carrying out an update of the Ethereum blockchain, on which most of DeFi’s applications are based. On September 15th it will move to a new mechanism for collective decision making, known as proof-of-stakewhich is much less energy-intensive: reducing energy consumption will be equivalent to shutting down Chile. This could pave the way for Ethereum to become more efficient at handling high volumes of transactions and a more credible global rival to finance. traditional.

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In the 20th century, the dollar overtook the pound as the world’s reserve currency, becoming widely used as a unit of exchange, a store of value and a means of payment. The next change in currency regimes may not be so clear-cut, as new technologies allow for the separation of some functions of reserve currencies – allowing countries to establish autonomy in payments, for example – without challenging the role of the dollar in others. areas. The dollar’s reserve currency status is not yet changing. But technology will change the meaning of being a reserve currency.

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(Extract from the foreign press review by eprcomunicazione)

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The article is in Italian

Tags: oust dollar global reserve currency

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