Subscribe to discover Om’s fresh perspectives on the present and future.
Can Crypto, China cause Dollardrums?
Link: The Changing Role of the U.S. Dollar / Brookings
TLDR: Whether it’s sanctions overuse, U.S. political dysfunction or crypto-led fintech innovations, the dollar can’t take its preeminence for granted anymore.
Key Points:
- The dollar’s position as the world’s dominant currency makes it central to global reserves, borrowing, payments and trade. This has been a significant benefit to the U.S., which has enjoyed lower borrowing costs and reduced risk of currency crises. However, the dollar’s role as the global currency of choice means it must absorb global savings imbalances and potential upward pressure on the exchange rate.
- The dollar’s share of global reserves has declined from more than 70% in 2000 to 59%, with the drop attributed to rise of “nontraditional” currencies rather than major competitors like the euro or yen.
- On paper, the dollar’s dominance might not be under immediate threat, but one can’t overlook the fact that everyone who has risked the ire of the U.S. has started to look for options. The rise of cryptocurrency and distributed digital money is the big challenge to dollar as the sole intermediary currency.
My Thoughts:
More than military dominance, the U.S. dollar has been the key instrument for America’s global dominance. It remains so, but it will increasingly come under pressure due to digitization and disaggregation of money. This is very much a continuation of the “routing around institutions” trend that has been a hallmark of the internet. My friend Pip Coburn in 2010 described how the internet enables “distribution techniques are shredding old business models” as “routing around institutions.”
The rise of “nontraditional” currencies in global reserves speaks to a desire for higher yields and a hedge against dollar-centric risks. This trend, while gradual, signals a subtle rebalancing of the global financial system. The U.S. faces a delicate balance – maintaining the dollar’s strength while adapting to a world where its role as a “middleman” currency may diminish.
One thought on this post
Comments are closed.
The US dominance on the global stage maybe shrinking to a new global middle class of countries that expressing their newly prominent power, but crypto is not that. If you track crypto currency versus sp100 indexes it is more correlated than any legitimate hedge against should be. Beyond that (I have not researched this) if you look at holders of crypto, I would bet that by value, US crypto holders as a percent exceeds the share US holdings of US debt or equities. I can’t think of a good hedge against American hedgemony, but at the same time, given the implications of what that world would look like, I’m not sure that is a future I necessarily want to live in.
The long term threat to the US dollar is real, but the time horizon is long and grim.