According to Moody’s Investor Service, the dominance of the US dollar in global trade and banking will last for decades. Furthermore, even if a multipolar monetary system emerges, the dollar will still be in charge, the firm added.
As per Moody’s, a number of factors have added to the speculation about an end to the US dollar’s dominance. These factors include a decline in the USD percentage of reserves held by central banks, simmering geopolitical tensions, and increasing brinkmanship in American politics.
A Moody’s analyst noted that the biggest near-term danger comes from “the risk of confidence-sapping policy mistakes.” One example of this would be a US default on its debts. However, the White House and Republican negotiators have made some progress in their talks to raise the debt limit. The US reached its $31.4 trillion statutory debt limit in January of this year. The Treasury Department has cautioned that the government may not have enough money to pay its dues by as early as June 1.
US dollar dominance remains unchallenged
In the fourth quarter of 2022, the percentage of dollar-denominated official FX reserves reached a 20-year low of 58%. According to figures from the International Monetary Fund, this number has decreased from around 78% at the turn of the century.
The dollar’s reserve share is expected to decline even further, according to Moody’s. However, its main competitors, the euro and renminbi, will find it difficult to quickly catch up. The dollar index, which compares the value of the dollar to six other currencies, increased 0.4% on Thursday to a two-month high of 104.23. The index has increased by 0.7% for the year.
Moreover, the USD continues to dominate international trade. Although there have been fears that the Chinese Yuan will soon overtake the USD, the American greenback still accounts for more than 80% of international trade. The Yuan, on the other hand, represents less than 10%. Therefore, the dominance of the dollar will not be challenged anytime soon.