What Currency Will Replace the US Dollar in a Multipolar Economy

The US dollar's dominance in the global economy is being challenged by emerging economies and alternative currencies. The International Monetary Fund (IMF) has been exploring new reserve currencies, including the Chinese renminbi (RMB).

The RMB has been gaining traction as a potential replacement for the US dollar, with China's growing economic influence and trade relationships with other nations. The IMF has included the RMB in its Special Drawing Rights (SDR) basket, recognizing its increasing importance in international trade.

The European Union's euro is another contender for replacing the US dollar, particularly in Europe and among European trading partners. The euro has been a widely accepted currency for international transactions, and its adoption has helped to reduce trade barriers within the EU.

Calls for de-dollarization have been heard for decades, with concerns over the dollar's hegemony and the US's monetary and fiscal discipline dating back to 1965.

The global financial crisis of 2007-08 further questioned the dollar's dominance, and these concerns have reemerged with the Russia-Ukraine conflict.

Russia and China have sought to unchain their ability to trade, using their economic clout and resources to dethrone the dollar and revise the global financial system.

Brazil, however, still relies on the dollar as a benchmark, even after reaching an agreement with China to use the yuan for trade.

Russia has sought to increase its economic independence by reducing its reliance on the dollar, but it's still a minority effort, with China also trying to increase the internationalization of the yuan.

The digital yuan, issued by China, is being rolled out gradually, with the eastern city of Changshu starting to pay public employees in the currency recently. This move has sparked a de-dollarization debate, with some seeing it as a key component of an alternative to the dollar-based order.

Settling cross-border payments in the digital yuan could be cheaper and easier than a dollar-based system, boosting its usage internationally. This is according to Diana Choyleva, the chief economist at Enodo Economics.

Zimbabwe has also launched its own digital currency, the digital Zimbabwe dollar, backed by gold.

The dollar's global status is still strong, with a relatively high rate of return on investment and unmatched liquidity in terms of storage.

The US remains the world's largest economy, which is a big reason why the dollar is so widely used. The American payment system is also employed by global payment systems.

Other countries have been complaining about the US using the dollar as a "weapon" to undermine their confidence in it. This has led to a decline in the dollar's share among global reserves, from 70 percent to 58 percent over the past 20 years.

The US government has used the dollar to punish countries like Russia for their actions, such as suspending Russia's use of the SWIFT international payment network. This move prevented Russia's central bank from using its foreign exchange reserves.

The euro is already the world's second most commonly held reserve currency, accounting for 20% of global foreign exchange and international debt.

Its widespread use is evident in international transactions, but it still lags behind the US dollar, which holds the top spot.

The European Central Bank reports that the euro's share of the global pie is a far second to the greenback's.

The euro's recognizability, stability, and economic might make it a strong contender to challenge the dollar's dominance.

According to South Africa-based money manager Vestact, no other currency comes close to replacing the dollar, except maybe the euro.

Digital currencies like Bitcoin are eyeing a slice of the USD pie, with China's yuan and Zimbabwe's digital dollar already being rolled out. China's digital yuan is being gradually rolled out in the country, with the eastern city of Changshu recently starting to pay public employees in the currency.

The digital yuan has sparked a de-dollarization debate, with some experts believing it's a key component of an alternative to the dollar-based order that Beijing is building. The digital yuan could also make settling cross-border payments cheaper and easier than a dollar-based system, boosting its usage internationally.

Countries like El Salvador and the Central African Republic have already adopted Bitcoin as an official currency, with El Salvador even adding it to its national reserves.

The BRICS nations are making a bold move towards a common currency, which could give them more control over their economies and international trade. This group of emerging countries, comprising Brazil, Russia, India, China, and South Africa, has been discussing the idea of a shared currency for some time.

Russian President Vladimir Putin floated the idea as early as June 2022, but it's only recently gained traction. Brazil President Luiz Inácio Lula da Silva has also expressed support for the idea, asking "Why can't we do trade based on our own currencies?" during a state visit to China.

The BRICS nations will discuss the common currency "properly" at an August meeting of the bloc's leaders in Johannesburg. This could be a rival to the US-dominated IMF's Special Drawing Rights, or SDR, which is an international reserve asset based on a basket of five currencies.

A common BRICS currency would give the group more geopolitical clout and allow them to build their own sphere of influence. Chris Turner, the global markets head at Dutch bank ING, sees this as a move to address the perceived US-hegemony of the IMF.

The euro is already the world's second most commonly held reserve currency, accounting for 20% of global foreign exchange and international debt. It's a significant milestone, but still far behind the greenback's share of the pie.

The European Commission has ambitious plans to boost the euro's use in international payments and challenge the dollar's dominance. This is evident from a proposal in 2018 to boost the role of the euro after the US withdrew from the Iran nuclear deal unilaterally.

No other currency has the recognizability, stability, and economic might behind it, according to South Africa-based money manager Vestact. The euro is the only currency vaguely close to being able to replace the dollar.

Digital currencies and competition are on the rise, eyeing a slice of the USD pie. China's digital yuan is being rolled out gradually in China, starting with the eastern city of Changshu, where public employees are now being paid in the currency.

Settling cross-border payments in the digital yuan could be cheaper and easier than a dollar-based system, boosting its usage internationally. The digital yuan is a key component of an alternative to the dollar-based order that Beijing is building.

Other countries are following suit, with Zimbabwe launching its digital Zimbabwe dollar just this month, backed by gold. El Salvador and the Central African Republic have adopted Bitcoin as an official currency, with El Salvador even adding Bitcoin to its national reserves.

This trend can lead to a redistribution of leverage power away from the largest states and their ability to expand their balance sheets at will.

The dollar's dominance is slowly eroding, but it won't disappear overnight. There's currently no global alternative, and both the euro and the yuan face their own problems.

The yuan is a strong contender, with 46 economies allocating more than 5% of their foreign exchange reserve assets to it by the end of 2020. China's economy needs to improve, and institutional reform needs to progress for the yuan to gain more traction.

Digital currencies, including cryptocurrencies like Bitcoin, are also vying for the dollar's position. China's digital yuan is being rolled out gradually, and other countries like Zimbabwe and El Salvador have adopted digital currencies as official currencies.

Multilateral Partnerships play a crucial role in shaping global currency scenarios. In a scenario where the US dollar is losing its reserve currency status, the International Monetary Fund (IMF) has been working with the European Union to establish a new global reserve currency basket.

The IMF has been actively engaging with other major economies, including China, Japan, and the UK, to discuss the potential creation of a new global reserve currency. This effort aims to reduce dependence on the US dollar and promote a more stable international monetary system.

The Asian Infrastructure Investment Bank (AIIB) is another example of a multilateral partnership that is working to promote regional economic development and reduce reliance on the US dollar. AIIB's membership includes 21 Asian countries, as well as several non-Asian countries, including the UK and Germany.

The AIIB has committed to using the US dollar, euro, and renminbi in its operations, demonstrating a shift towards a more multipolar global currency landscape.

The primacy of the dollar has remained largely unchallenged, but recent developments like economic sanctions imposed by the U.S. are contributing to ongoing de-dollarization efforts.

The dollar's dominance will slowly begin to erode, but it is unlikely to end overnight. There is currently no real global alternative, and both the euro and the yuan face their own problems.

According to the IMF, by the end of 2020, 46 economies had allocated more than 5 percent of foreign exchange reserve assets to the yuan or to those outside the basket of “special drawing rights” currencies.

The yuan is undoubtedly among the best of the nontraditional currencies, with the potential to gradually overtake the British pound and the Japanese yen in terms of payments, transactions, and reserves.

No one can guarantee stable growth of the Chinese economy, which is crucial for the pace of yuan internationalization and de-dollarization to remain on track.

If Chinese growth keeps decelerating, the pace of yuan internationalization and de-dollarization will also be greatly slowed.

The dollar's reign is slowly coming to an end. Economic sanctions imposed by the U.S. are contributing to de-dollarization efforts, which may lead to a prolonged depreciation of the dollar.

The yuan, China's currency, is gaining traction as a potential alternative to the dollar. According to the IMF, 46 economies had allocated more than 5% of foreign exchange reserve assets to the yuan or to currencies outside the basket of "special drawing rights" currencies by the end of 2020.

The yuan is expected to gradually overtake the British pound and the Japanese yen in terms of payments, transactions, and reserves if China's economy improves after the second half of this year. Institutional reform progress will also be crucial for the yuan's growth.

Digital currencies, including cryptocurrencies like Bitcoin, are vying for a slice of the dollar's pie. China's digital yuan has sparked a de-dollarization debate, and its usage is being rolled out gradually in China.

The euro is already the world's second most commonly held reserve currency, accounting for 20% of global foreign exchange and international debt. However, no other currency has the recognizability, stability, and economic might behind it, making it a far second to the dollar.

The BRICS group of emerging economies, including Brazil, Russia, India, China, and South Africa, is working towards de-dollarization and establishing a common currency. This effort is part of a broader movement to diminish the influence of the United States dollar in regions like Southeast Asia, Africa, and the Middle East.

The dollar's dominance is a complex issue, with a relatively high rate of return on investment and unmatched liquidity in terms of storage.

The U.S. remains the world's largest economy, and global payment systems employ the American payment system.

Other countries have complained about the dollar's tendency to be "weaponized", undermining their confidence in it.

This has led to a decline in the dollar's share among global reserves, falling from 70 percent to 58 percent over the past 20 years.

The Biden administration's decision to suspend Russia's use of the SWIFT international payment network was a case in point, preventing Russia's central bank from using its foreign exchange reserves.

Fitch Ratings recently downgraded the U.S. long-term credit rating, citing trade friction with China and bipartisan bickering in Washington over fiscal issues.

Despite these challenges, the dollar's dominant position will be difficult to shake as long as the American economy remains strong.

The dollar's supremacy in the global currency market is a result of its ability to embody three key functions: valuation, payment, and storage. The dollar's asset storage role is particularly important, as it serves as a reserve asset for global central banks and a dependable asset for private investors, banks, and other institutions.

At the end of 2022, the dollar accounted for 58.36 percent of global foreign exchange reserves, making it the most widely held reserve currency. The euro came in second, with a share of 20 percent.

The dollar's economic strength and military power have historically backed its supremacy. The U.S. accounted for 50 percent of global GDP in the post-World War II period, although its share has since decreased to 20-25 percent.

The dollar's petrodollar system, established in 1971, has been a key factor in its continued dominance. This system requires oil transactions to be settled in dollars, which are then deposited in American banks to buy American bonds.

The euro, however, is gaining ground as a reserve currency. It currently accounts for 20 percent of global foreign exchange and international debt.