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USD experiences numerous risks

There are a few factors that might disrupt the greenback’s dominance. According to researchers from the Brookings Institution, there are four major challenges to the dollar's supremacy in the financial markets.

Analysts note that over the past few decades, the dollar’s use has steadily decreased. Despite this, the dollar still dominates central bank reserves and global trade. However, this year, other currencies have significantly gained ground. According to the IMF, by early 2024, the Australian dollar, Swiss franc, and the Chinese yuan made up 11% of all central bank reserves. Back in 1999, this number was less than 2%.

Amid these shifts, investors are starting to worry that the dollar could lose its leadership in the financial markets. One of the main reasons is US sanctions. This is the first threat to the greenback’s dominance. Since 2022, severe sanctions have been imposed on Russia and its allies, triggered by the Russia-Ukraine conflict. This has sparked a push towards "de-dollarization" in Russia and other BRICS countries. Many of them have declared their intention to move away from the dollar.

Russian authorities have taken such steps as shifting to a yuan/ruble exchange rate and creating an alternative payment platform that does not rely on the dollar. China also followed this path, promoting its yuan as an alternative currency. "If the United States is capricious with sanctions, acts unilaterally, and fails to develop a doctrine of economic statecraft, the dollar could be dethroned,” US Treasury Secretary Janet Yellen said.

Another challenge to the greenback’s dominance is the ever-growing US national debt. Experts believe that increasing debt could make holders of USD more cautious. While the situation is currently under control, this fragile balance could be disrupted. The government's rapid spending only aggravates the situation. In 2023, Fitch downgraded the US credit rating, citing a “steady deterioration” in governance standards.

Innovations in payment technology also pose a threat to the dollar's hegemony. Modern payment systems have made it easier to exchange most currencies, potentially reducing the demand for dollars. "Typically, converting such currencies to dollars, and vice versa, has been easier and cheaper than exchanging them for one another. But China and India, for example, will soon no longer need to exchange their respective currencies for dollars to conduct trade cheaply. Rather, exchanging renminbi for rupees directly will become cheaper. Consequently, the reliance on 'vehicle currencies,’ particularly the dollar, will decline," Eswar Prasad, a senior fellow at the Brookings Institution, noted.

Finally, central bank digital currencies (CBDCs) are seen as a serious challenge to the US currency. These innovative payment instruments, issued by regulators, could simplify and reduce the cost of transactions. Thus, China built the Cross-border Interbank Payment System (CIPS), which has been steadily growing for years. Meanwhile, the Federal Reserve has created its own instant payment network, but it could fall behind the rest of the world in payment technologies. Brookings analysts warn that the US risks falling behind other countries, as creating a digital currency would require approval from lawmakers.

Despite all this, most currency experts doubt that de-dollarization will happen anytime soon. For now, there are no worthy competitors to the dollar in the financial markets. Many countries that attempt to move from the greenback may face harsh economic consequences, including slower growth and a loss of investment value, the researchers concluded.

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