US dollar as the global currency

With the impact of technology and the geopolitical changes happening in the global economy is the US dollar coming under pressure as the world’s reserve currency? The data indicates that the US dollar still reigns with approximately 60% of the world’s central banks’ foreign exchange reserves invested in US dollar-denominated assets. Most commodity contracts, like oil, are priced and settled in dollars. It is used as the medium of exchange for the majority of global transactions – see chart below:

The US economy now accounts for about 25% of global GDP (at market exchange rates), down from 30% in 2000 and changes are happening in foreign exchange markets. One area that has impacted this is that transactions between emerging market currencies are becoming easier. China and India, for example, will soon no longer need to exchange their respective currencies for dollars to conduct trade cheaply.

What about the Chinese renminbi? Although there has been some progress with the renminbi as it now accounts for approximately 3% of international payment transactions, and 3% of global foreign exchange reserves are held in renminbi. However it is unlikely to challenge the dominance of the dollar unless there are market driven reforms and upgrades to its institutional framework.

US dollar debt Foreign investors, including central banks, hold nearly $8 trillion in US government debt. Overall US financial obligations to the rest of the world total $53 trillion. Because these liabilities are denominated in dollars, a plunge in the value of the dollar would make no difference to the amount the United States owes but would reduce the value of those assets in terms of the currencies of the countries that own them. China’s holdings of US government bonds, for instance, would be worth less in renminbi.

Source: Enduring Preeminence by Eswar Prasad. IMF Finance & Development. June 2000

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