Can anything challenge the almighty dollar's dominance? | Business Beyond

[Music] as is an era of dollar domination if they can be said to be a world currency the US dollar is undoubtedly it the vast majority of international trade is done in dollars and it's the currency of choice for central banks hoping to save up for tough times so in this video we'll explain the Dollar's rise to power people use the dollar because they've always used the dollar we'll find out what keeps it at the top of the money tree where would you rather be invested right now when you look at the world as a whole for many people the answer is the U.S and reveal whether the Dollar's Supremacy can ever be challenged if so by what some changes are coming even for the dominant currency such as the dollar it could become a less important payment currency in international transactions all the dollars days as the king of currencies numbered or has it attained an unassailable edge find out in this edition of business Beyond 1944 a war that's brought misery to Millions is entering its end game meanwhile the dollar is being set on course for world domination meeting at Bretton Woods in New Hampshire representatives of 44 countries agreed to a New World Monetary order with the U.S currency at the center of it certainly the U.S emerged from World War II as the world's uh dominant eating economy and the Bretton Wood system that was created after World War II uh had embedded within it as a particular role for the dollar I mean the dollar had a link to Gold but other currencies we're all linked to the dollar so the post-war monetary system uh embedded within it the centrality of the dollar we must protect in the 1970s U.S president Richard Nixon ditched the Dollar's convertibility to Gold but by then it had already been firmly installed as the central currency for global trade crisis every year and because of the United States size the dollar in a sense was a natural currency for most International transactions and there's the added advantage that because the dollar was the central currency of the system if two countries wanted to trade with each other the easiest currency to use was generally the dollar and so it continues to be if entities in two different countries with two different currencies want to trade with one another they'll almost certainly do so in dollars the US currency is involved in 88 percent of international transactions what's more the dollar is the currency of choice for trading in all manner of globally important Commodities like oil coffee and gold but as well as sitting at the center of global trade the dollar dominates in another key field and regardless the world's most important Reserve currency that is it is the currency in which foreign central banks hold their doing their funds so to speak when it comes to having money set aside for hard times to fund exports service debt or balance their own currency central banks and treasuries more often than not put their faith in the dollar according to the international monetary fund of all of the foreign exchange reserves held by countries around the world over 60 percent of them are in dollars no other currency comes close the reality is that there aren't any serious arrivals to the dollar as a reserve currency when a country wants to make its currency a reserve currency needs to issue a lot of what they considered safe assets by the rest of the world and much of the rest of the world foreign investors both private and official seem to view U.S government securities as a very good place to park their money during times of economic turmoil what does the Dollar environment provide for investors deep and liquid Capital private Capital markets a legal system that protects property rights and free flow of capital the US has also been more willing than other countries to be the lender of Last Resort so I think all these factors create this environment whereby and I think this is important to underline as well we're not saying these factors are perfect but on a relative basis they seem to be more favorable for the US dollar to be a global Reserve currency we'll talk about whether any other currency can have a rival the dollar in the world's reserves shortly but first let's look at what the existent dollar Supremacy means for the United States there's a term that often gets used when discussing this very subject originally coined in the 60s by French Finance Minister and later president Valerie he describes dollar dominance as America's exorbitant privilege he was making a specific point about the use of dollars by central banks in Europe but that core idea that the U.S benefits greatly from its currency's power is still often cited the privilege is generally thought to be that the US and particularly the US government can borrow internationally at a slightly lower rate than would otherwise be the case the U.S can Finance current account mostly trade deficits more readily and more easily and with fewer risk than other economies uh and that certainly there's an element of Truth to that although all the major advanced economies Finance themselves in their own currency without any real difficulty and often can Finance themselves at lower rates than the US does so the constant Global demand brings advantages to the United States itself however what some describe as America's privilege can also sometimes be its burden one of the criticism is there is a lot of demand for the US dollar what does this do to the currency it leads you to appreciate and to be stronger than other currencies and the repercussions for the U.S economy is that it makes U.S exports less competitive a stronger currency will make U.S manufacturing for instance less competitive and some associate the long-term decline in U.S manufacturing sector in part to the to the role of the US dollar as a reserve currency it also creates a burden on the feds the FED has to in certain cases act as the dollar lender of Last Resort to the world and it did take up on that role in the global financial crisis and during the covet shock through the swap lines uh that's in some sense a burden but it's also to some in some sense a necessity uh because the the offshore dollar market is actually an important market for funding U.S companies and so instability in the offshore dollar market would clearly reverberate back that's what it means for the U.S but what are the costs and benefits of global dollar Supremacy for the rest of the world is the lack of competition at the monetary top table a positive or A negative certainly there is sort of a network efficiency uh that comes from having a dominant currency so that you know two countries in Africa that want to trade with each other know that that they can settle that trade in dollars and if they have dollars they can conduct that trade and they don't have to worry about negotiating a a settlement currency for every transaction so everybody using the dollar is basically convenient everyone knows where they stand and there's no messy bartering over which of two parties has the most desirable currency to hold but the involvement of dollars in so much of World Trade leaves economies far away from the United States subject to the effects of decisions taken there U.S monetary policy which is directed at domestic U.S conditions ends up having an outsized impact on Global Financial commissions and that can at times contribute to Financial economic difficulties around the world everybody in the past year has faced pressure on their currency in part because the U.S is a big economy and any shift in U.S monetary policy would have an impact globally but also in part because the dollar is used around the world and dollar interest rates have gone up around the world and so uh the the impact of dollars strength and fed tightly gets magnified so that's the double-edged sword of dollar dominance but could it actually be any other way let's get down to that question of whether the U.S currency is supremacy could ever be challenged and if so by what so let's go let's go deeply with capital markets protection of property rights Capital flows that are free how are they likely to change in five to ten years and where will these factors be more favorable than in the US can we look at another country that is as willing as the U.S to be the lender of Last Resort when you look at the global foreign reserves dollars dominant next is the Euro so when the Euro was created in 1999 it was believed that the Euro area could um end up with its currency becoming a serious competitor will dollar as a reserve currency as a payment currency and so on and it is true that the Euro area economies are put together had a science that was roughly equivalent to that of the US although that has shifted a bit over time now Euros or financial markets are quite large but certainly not as large as those in the US we saw earlier that the euro is number two when it comes to the world's foreign currency reserves albeit by some distance so what would have to happen for The Gap to close well one key thing holding the Euro back comes down to the very essence of the Eurozone it's a monetary Union made up of countries using the same currency but with very different economies as we went through the Eurozone debt crisis and other problems in Europe it appears that foreign investors don't quite you for instance a Greek Government Bond and the same way they would a German bull which is seen as a lot a safer and more liquid so if you pick the size of Eurozone financial markets it's concentrated and the core part of the Eurozone it looks much smaller than the US can the European Union move to a credible fiscal Union in the next five to ten years I think that could chip away a little bit from the U.S dollars to roll the Dollar's strength just recently has been partly down to the U.S economy's resilience to current world events that's something that sets it apart from the Eurozone war on the eu's doorstep and the economic hardship it's wrought on many European citizens has laid bare how vulnerable the Eurozone is to geopolitics Europe has been you know dealing with centrifugal fuse forces that threaten to pull the Zone apart so there is a fair degree of political instability uh within the Eurozone and that of course the axis and Reigns um but if you think about foreign investors um trying to find a place to put their money for the long term and there might be some concerns about Europe so the reality is that the fragmentation that we've seen in Europe despite the currency Union I think has kept the Euro from becoming a sub currency that could compete is over the US dollar so it seems we're not about to enter the Euro era just yet but if not the Euro can any other fiat currency ever rise to compete with the dollar [Music] could the world's second biggest economy behind the US provide the breeding ground for another truly Global Currency because it was only um about a decade ago that the Chinese government seen willing to allow the um it will be more widely used around the world and seem to be designers of making that an Indian International currency and Beijing scored a big win in its efforts to establish the Renminbi as a major Reserve currency back in 2016. the Yuan joined the ranks of the dollar the Japanese Yen the British pound and the Euro when the international monetary fund added it to the basket of currencies that make up its special drawing rights or SDR that's the IMs own Reserve asset that countries can use to top up their foreign Reserves since then the Chinese currency has lost momentum there any beer is essentially flatlined and that's because the Chinese economy first of all was not doing so well and the foreign industries were a little weary of putting their money in China's financial markets but more importantly I think foreign investors don't have as much trust in their inventory because China does not boast of many of these institutional uh framework elements that virtually every other Reserve currency economy enjoys such as the rule of law where even the government has to play by the rules of game once they are determined and then China has the National limitation that China cannot put its International reserves in itself um and so until there's an offshore Yuan Market of enormous eyes China's reserves are are their choices are more limited it's possible to imagine a world where more countries would want to hold their reserves in Yuan the U.S and EU were able to hit Russia in the pocket after its invasion of Ukraine by freezing moscow's access to its dollar and Euro Reserves the current system means the West has an overwhelming Stranglehold on the world's money stores no doubt some smaller countries uh could uh consider whether or not they wanted to take the risk associated with putting more of their Wizards in the Yuan whether as in an alternative to the dollar or as a hedge against the rest that your relationship with him but United States might might deteriorate but would that be enough to enable the Chinese currency to compete with the dollar I don't think that mnb has the potential to become a serious arrival to the dollar especially as a reserve currency although as China becomes more important in the global economy the global trading system and if China places cards right with certain reforms um to maintain the free flow of capital across its borders I could see that it will be becoming a more important payment currency but still not one that really seriously threatens to the dollar okay so that's basically the Euro and the Yuan out but what about other National occurrences how about the British pound or the Japanese Yen well despite having a couple of centuries of global domination itself the UK currency is showing no signs of returning to past glories and the share of global reserves denominated in Yen has actually declined in recent years though the US Dollar's share has been falling a little it hasn't been because of the behavior of other major currencies but this entire decline in the dollar share has been taken up by the smaller Reserve currencies such as the Canadian dollar um the Australian dollar and the smattering of other currencies so act most I see um some of the shares of these second and third game currencies Rising marginally the dollar share perhaps dropping a little bit but the gulf between the dollar and all the other currencies is if anything widening right now but could stiff competition come from a total newcomer 2023 kicked off with Brazil and Argentina saying they were beginning work on a shared currency with the aim of eventually allowing other South American countries to join it would be the world's second largest currency Union after the Euro but probably therefore even less likely to challenge dollar dominance so if traditional Fiat currencies are showing no sign of unseating the dollar could competition come from elsewhere and outside of the control of central banks cryptocurrencies provide speculators with a place to park their money and a means by which to buy products across borders so could they ever perform the same functions for economies around the world we certainly seem to be entering a new era of competition and money with privately issued currencies such as cryptocurrencies potentially taking on some of the functions of money but the reality we've seen it is that the decentralized cryptocurrencies such as Bitcoin which are basically issued and managed by computer algorithm rather than by any institutional agency they seem to have a very volatile value and are not working very well as mediums of Exchange but look at bitcoin's performance over just the past two years shows you that that's all too true its value against the dollar has fluctuated wildly there are so-called stable coins that aim to provide a less risky investment but they do so by pegging themselves to other assets like for example Fiat currencies I think compared to most cryptocurrencies the dollar actually has a ton of advantages well regulated certainly by comparison to crypto markets financial institutions that can act as intermediaries a deep and liquid market for interest varying Securities um a counterparty if you buy U.S treasuries uh that is the most credible counterparty in the Global Financial system so I actually have a little bit of difficulty believing that cryptocurrencies are a realistic alternative to be honest and we'll probably spend many years debating at the relevance of cryptocurrencies as a reserve currency for the world let's see what happens in the next five to ten years our central banks going to move towards digital currencies that are less speculative in nature and more stable in value then the answer could change so no obvious signs of cryptos challenging the dollar either but just because no Challenger among the digital or traditional currencies seems likely to emerge that doesn't mean we won't see the Dollar's power diminish and new technologies PLUS Financial development and energy mind it's it's making it easier to create a personal Emerging Market currencies without an intermediating currencies such as six dollars so the Dollar's role has a vehicle currency in international payments um I think it's likely to decline but what's our overall verdict are the days of dollar dominance showing any signs of ending I think we could live in a world where it doesn't remain such a dominant uh Global Currency and Reserve currency but I I do not see these factors as playing out to unseated completely I think it is hard to see the dollar ever just becoming another small currency that's not a big part of the the global system some changes are coming even for a dominant currency such as the dollar as a reserve currency however my viewers said the dollar is likely to retain its dominance for a long time to come that's all from this edition of business Beyond but if you've made it this far we reckon you'd enjoy this video too we'll see you over there

Channel: DW News

Views: 203,289

Keywords: DW News

Id: m7CvPewbTyQ

Length: 21min 9sec (1269 seconds)

Published: Fri Mar 10 2023