Renowned American Think Tank: "US Dollar Hegemony" Faces Four Challenges

The researchers at the well-known American think tank Brookings Institution pointed out in a recent report that the dominance of the US dollar in the financial markets is facing some challenges.

The think tank stated that the position of the US dollar in the global financial markets is changing, with the usage of the dollar steadily declining over the past few decades. According to the International Monetary Fund (IMF), although it still dominates central bank foreign exchange reserves and world trade, the share of the US dollar in global foreign exchange reserves has dropped from 71% in 1999 to 59% by early 2024.

The share of the US dollar in global central bank foreign exchange reserves has declined over the past few decades.

At the same time, the proportion of non-traditional reserve currencies is increasing. According to IMF data, currencies such as the Australian dollar, Swiss franc, and Chinese yuan accounted for 11% of all central bank foreign exchange reserves at the beginning of this year, up from 2% in 1999.

The share of non-traditional reserve currencies in global central bank foreign exchange reserves is growing.

This has raised concerns among some investors that the US dollar may soon be dethroned from its top position in the financial markets. While most experts believe this scenario will not happen quickly, the think tank points out four key challenges to the dominance of the US dollar.

1. US Sanctions Abuse

Since the outbreak of the 2022 Russia-Ukraine conflict, the United States has begun imposing sanctions on Russia and its allies. This has triggered a de-dollarization movement in Russia and other BRICS countries, with these nations seeking to move away from the US dollar in response to Western trade restrictions.

In particular, Russia has taken significant steps to advance economic de-dollarization. The country has adopted a renminbi-ruble exchange rate system and proposed a currency that can rival the US dollar, reportedly leading the establishment of an alternative payment platform independent of the US dollar.

Citing comments from US Treasury Secretary Yellen, researchers at the Brookings Institution said, "If the US capriciously imposes sanctions, takes unilateral actions, and fails to establish a set of economic governance principles, the US dollar may be replaced."

2. High US Debt

The continuously rising US debt burden may make holders more cautious about the US dollar, especially when there are concerns about the US's ability to repay its debts.

Although the US debt balance has not yet reached unsustainable levels, the government's rapid spending pace is keeping the market on edge. For example, Fitch downgraded the US credit rating last year, citing the "continuing deterioration in governance."

Researchers said, "Due to the constant bickering in Congress over appropriations, the government has shut down several times. Further political instability could weaken investor confidence in the US dollar."

3. Payment Technology Enhancement

More advanced payment systems make it easier to exchange non-traditional reserve currencies. This may suppress the demand for the US dollar, which has always been seen as the most attractive medium of exchange.

Eswar Prasad, a senior fellow at the Brookings Institution, stated in a previous report:

"Typically, it is easier and cheaper to exchange these currencies into US dollars and then into other currencies than to directly exchange them. However, taking China and India as examples, they will soon no longer need to exchange their currencies for US dollars to conduct inexpensive trade. Instead, exchanging Renminbi for Rupees directly will become cheaper. Therefore, reliance on 'medium of exchange' currencies, especially the US dollar, will decrease.

4. Central Bank Digital Currency

Digital currencies issued by central banks can also make the use of non-traditional reserve currencies easier and cheaper. The think tank pointed out that China is developing a central bank digital currency, and China's Cross-Border Interbank Payment System (CIPS) has "developed rapidly" in recent years.

The Federal Reserve has established its own instant payment network but has not taken action to create a central bank digital currency. Powell stated last year that digital currencies would require approval from lawmakers. Researchers at the Brookings Institution say this means the US may fall behind other countries that are rapidly developing digital payment technologies.

Nevertheless, most currency experts do not believe that de-dollarization poses a short-term threat to the US or its currency. A commodity expert previously stated that currently, there is no competitor close to the US dollar in the financial markets, and countries attempting de-dollarization are still facing a series of economic consequences, such as slowing growth and loss of investment value