Currencies Competing with the US Dollar as a Global Reserve

●      Part Three ........dated 10-11-2022

●      Currency Competition

●      The dollar will remain safe as long as the non-American foreign investor acquires dollars, whether the purchasers are governments, companies, or even individuals; that is, they acquire the dollar as the invoice currency for goods and services in international trade, or as monetary reserves, as central banks around the world do, and this is the secret of the dollar's strength. On another level, the dollar’s role in fact functions as a measure of value for debts denominated in it between global corporations, governments and international financial institutions, and it is worth noting that the largest financiers in the world are American financial institutions.!

●      The U.S. bonds purchased by countries by the end of August 2022 amounted to $7.5 trillion, and the average purchase of U.S. bonds for the period between 2021 and August 2022 amounted to $1.2 trillion for Japan, then $1.0 trillion for China, followed by Britain with $615 billion. (Stated in an article in the newspaper "Al-Eqtisadiah" by Ahmed Al-Shahri under the title "The Future of the Dollar", dated 25-10-2022)...

●      Data from the International Monetary Fund for the second quarter of 2022 indicate that the size of dollar monetary reserves of central banks globally fell to 59.5%, with a total value of $6.6 trillion, in all central banks around the world. It should be noted that the size of this reserve in 1999, the dollar share of reserves was 71% at central banks of total other currencies (as we indicated in a previous article.. according to IMF statistics).

●      Although the relative weight of central bank dollar reserves has declined over past decades, the practical reality and the evidence still give it priority to continue its role in invoicing trade and contracts globally, and as a trusted intermediary among all, and this is due to the mechanism of how the dollar works, especially with debt, interest rates, and the linkage of major commodity and oil exporting countries to the dollar; moreover, the productive strength of the U.S. economy still leads the world, where U.S. output constitutes 24% of global GDP, with China in second place at 17%, according to IMF data for 2021...!

●      I present to you a summary of the currencies competing with the U.S. dollar as a global reserve currency..

-        (From the content of the Economist Alex Entz article dated 4-2-2021)

●      First- The Japanese Yen

-        Americans believed that Japan represented a major threat to the United States. However, after the stock and real estate crisis burst in the early 1990s, Japanese growth slowed, inflation collapsed to almost zero, and thus the belief in the yen's competition with the dollar waned.

●      Second –The European Currency (the Euro)

-        The euro (which is the currency supported by the European Central Bank, and was introduced in 1999) has, over the past two decades, become the most competitive currency to the dollar, with about (20%) of global reserves currently held in euros (the second-largest share of reserves), but the euro's ability to dominate is undermined by several major problems, including:

1-   That the euro is a comprehensive currency, traded across the economies of (28) countries that do not share a common asset market that investors need, and there are few such markets in the Eurozone...!

2-   The euro also faces weak growth, and therefore investors may shy away from placing their money in markets that may face deterioration.

3-   There is a problem in the Eurozone that lies in its policy: as a monetary union without a fiscal union, the Eurozone has struggled to offset periods of boom and destructive credit collapse. This has led to a wide divergence in economic outcomes, fueling political resentment among countries...!

4-   Enthusiastic defenses of national sovereignty will thwart efforts to form a permanent fiscal union among European countries, and Britain’s exit from the European Union may be followed by exits of other countries such as Italy. In that case, investors will not find security under economies clouded by doubt...!

●      Third-  The Chinese Currency (the Renminbi)

-        The internationalization of the "renminbi" is a key element in China's strategy, noting that internationalization will reduce China's dependence on the United States. In this context the Chinese government pushed private companies to issue invoices and settle deals in renminbi, asked state-owned companies to follow suit, and encouraged other central banks to adopt the renminbi. The "Belt and Road" initiative, through which it seeks to use its institutions to finance and build infrastructure in up to (68) countries, will also help internationalize the renminbi by creating a trade system centered on Chinese companies.!

-        On the challenges front, China faces some major short-term obstacles: currently only (2%) of cross-border transactions are conducted in the Chinese yuan (renminbi), and instead of continuing to liberalize its capital account, China tightened capital controls...! Therefore, to compete directly with the dollar, China must end capital controls, liberalize interest rates, and allow the yuan (the main unit renminbi) to float. However, implementing the foregoing requires a major change in the Chinese development model and a reduction of the Chinese Communist Party’s control. Hence the growing importance of China in global markets makes the Chinese yuan a long-term competitor to the dollar.

●      Fourth– The Special Drawing Rights System.. International Monetary Fund:

-        It is among the traditional competitors to the dollar’s status; it is an international reserve asset created by the International Monetary Fund, which allocates a reserve asset called "Special Drawing Rights" (SDR) to member countries, with a value based on a basket of currencies (China achieved a major success in internationalizing its currency when the IMF included the yuan in this basket in 2015). The primary objective of Special Drawing Rights was to serve as an additional form of liquidity in the dollar-based Bretton Woods system. The IMF has drawn on that reserve only on four occasions since its establishment in 1970.

●      Fifth – Cryptocurrencies (virtual):

-        U.S. policymakers realize that the world is changing and that sooner or later it will move toward digital currencies. In recent years the world of financial transactions has witnessed a digital revolution amid the rapid growth of unofficial cryptocurrencies, such as Bitcoin, and the adoption by newer generations of electronic payment systems, gradually moving away from paper and coin currency, preferring to pay via their mobile phones and contactless systems. The prevailing view now is that if central banks do not move to keep pace with these changes, people may turn to alternative informal systems, most notably cryptocurrencies.

-        The emergence of cryptocurrencies by companies has prompted some countries to consider issuing cryptocurrencies as an alternative to the traditional banking system. In 2021, Bank of England Governor "Mark Carney" proposed that central banks jointly create a virtual currency to serve as a global reserve currency as an alternative to the dollar!

●      It is noticeable that the strongest alternative to the dollar as a global reserve currency is digital currencies, whether issued by central banks of countries or cryptocurrencies that conceal the identities of participating parties in international financial transactions, and they are in themselves an effective means to evade the sanctions and blockade regime adopted by the United States of America and Arab countries allied with it...

-        Source

-        Alex Entz, “The Future of the Dollar”, National Affairs, no. (45), Fall 2020, PP. 83-99.