The current world economy and massive US government debt have led some to speculate that the US Dollar will eventually fall out of favor, losing its current status as the world’s default currency sometime this century. Market analysts say that if the dollar were to lose its status, the Euro or the Yuan would become the new default currency.
Will the US Dollar become a footnote in world history, supplanted by the Euro or China’s Yuan? Or will the US Dollar remain the world’s most important currency?
The Case for the US Dollar
It’s not exactly a secret that several years of economic recession and massive amounts of US government debt have led to a weaker Dollar. Yet, despite these problems, the Dollar is still the most widely used currency in the world.
- According to the Bank for International Settlement’s 2010 Triennial Central Bank Survey, 85 percent of global foreign currency transactions involve the US dollar.
- The Dollar is the dominant currency for all international trade. Oil barrels, for example, are priced in US dollars, as is Gold and almost all other commodities
- The Dollar is the world’s dominant reserve currency. Many banks and governments place some or all of their cash reserves in US dollars to hedge against fluctuations in other currencies.
- Finally, the Dollar is the official or “unofficial” currency used in several countries around the world. From Costa Rica to Cambodia, US Dollars are accepted as payment around the world.
Yet, despite the dollar’s ubiquity and international reputation, the surging Euro and Yuan have emboldened skeptics of the US Dollar.
The Euro
As one of the world’s newest currencies, the Euro has quickly made its mark. Thanks in part to its rapid adoption by 17 countries and its 332 million Europeans, the Euro is now used in 39 percent of the global foreign currency transactions.
What’s more, the Euro is backed by multiple countries and economies, which could be construed to be an advantage over the US Dollar. The Euro can’t be manipulated by governments as easily as the US Dollar, something that might give the Euro a boost in the eyes of the rest of the world.
Of course, while the growth of the Euro has been impressive, current issues facing the European Union have stymied all talk of the Euro becoming the world’s dominant currency. The largest issue? Greece’s recent threat to pull out of the EU and revert to their own currency has shown that the Euro isn’t as stable as the Dollar. Since any European country can reject the Euro at any time, it’s much less likely to gain the world’s confidence and default currency status.
The Yuan
As China’s official currency, there are a lot of reasons to think the Yuan will one day become the world’s dominant currency:
- China has enjoyed decades of strong economic growth, and as the world’s second-largest economy, China seems likely to eclipse the United States as the world’s biggest economy at some point in the next 20-30 years.
- China’s government has no debts, holds plentiful currency reserves, and owns numerous assets both foreign and domestic.
- China’s proximity to up-and-coming economies in Asia, as well as established economies in South Korea and Japan, give it a regional boost that the United States does not enjoy.
These facts would seem to indicate that the Yuan will one day become the world’s dominant currency, but there are a couple of issues.
First, the Yuan is only used in 10 percent of the global foreign currency transactions, largely because the Chinese government has rules that make the foreign direct investment very difficult. Foreign business interests can’t acquire Yuans directly…at least not without a Chinese company as an official partner.
Second, China’s banking system is government-controlled. As a result, there is concern that the Chinese government could manipulate the Yuan – or perhaps refuse currency exchanges with rival governments for political gain – if the Yuan ever became globally dominant.
…Which brings us back to the US Dollar. While there are certainly concerns about US government debts, the truth is that the US Dollar is stronger than the Euro and more trustworthy than the Yuan thanks in large part to the US economic policies which encourage free trade. Unless the Chinese change policy and the EU becomes a lot stronger, the US Dollar will be dominant for years to come.
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