The dollar is weakening like never before. What currency can replace it?

The dollar is pregnant today that the federal reserve will be forced to reduce interest rates due to the poor economic situation – but this is only one of the factors. The second is Donald Trump. He wishes a weak dollar and undermines the independence of the central bank, publicly calling the chairman of the Fed Jerome Powell a “fool” for his cautious monetary policy. Added to this is the unpredictable customs policy of Trump, a departure from multilateralism and budget plans deepening debt – all this undermines trust in the US abroad. Investors around the world are starting to think about their positions in Dollara.

Avoiding dollar investments

Funds specializing in US bonds recorded in the second quarter the largest outflow of funds from the time of swirls related to the Covid-19 pandemic in 2020. According to the last available data of the Treasury Department in April, the value of US tax bonds owned by foreign investors fell by $ 36 billion. The largest decrease was recorded on the accounts of Canadian investors: from 426 to $ 368 billion. Although in the context of a total foreign debt exceeding $ 9 tr. These numbers do not seem dramatic, The direction is clear: American bonds and other dollar assets are less popular, which harms the position of the dollar.

However, a completely different issue is whether the decrease in the value of the dollar and loss of trust will also affect its international importance. Since the end of World War II, the dollar remains unrivaled the most important world currency. His position was sanctioned by agreements with Bretton Woods from 1944, which introduced a system of permanent exchange rates based on convertible dollars. Even after the collapse of this system in the early 1970s, the dollar retained the dominant role, despite the fact that the US participation in the global GDP fell from about 40 to 25 percent. Neither the rapid economic development of Japan nor the introduction of the euro was able to change this dominance.

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The hegemony of the dollar has many dimensions

Even today, when Europeans buy oil from the Persian Gulf countries, they pay in dollars. 80 percent on the raw materials market Transactions are carried out in dollars. On average, half of all international trade transactions are invoiced in dollars. The dollar is also used in about half of all payment transactions carried out through the Swift system.

In currency trading, the dollar occurs in almost every second transaction. It is also the most important financial currency – about half of all cross -border bonds and loans are denominated in dollars. Central banks that store foreign exchange reserves to be able to fulfill international obligations and stabilize their own currency courses, keep these reserves mainly in dollars. With the share of nearly 60 percent The dollar still remains the most important reserve currency.

The advantages of dollar investments are their huge supply and high liquidity. According to the Bank of International Settlements (BIS), the size and depth of capital markets based on the dollar generate network effects that “attract both investors and issuers”.

Is the euro time?

The dollar position is strong, but it crumbles – and not since yesterday. – The share of the dollar in global foreign currency reserves has fallen over the past 25 years from about 70 percent. up to just below 60 percent – says American economist and dollar expert Barry Eichengreen. However, the main beneficiaries of this process are not euro or Juanbut the currencies of smaller, open and well -managed economies, such as Switzerland, Australia, Canada, New Zealand, Singapore, South Korea, Denmark and Norway. Despite this, even together they are not able to threaten the dominance of the dollar or replace it.

A natural candidate would be euro. From the beginning of its existence, the share of the euro in foreign currency reserves has never exceeded 25 percent. The debt crisis in the euro area has strained trust in the common currency and slowed its internationalization. Although the euro was well rooted as a commercial currency (participation in invoicing transactions is 40 percent), as a reserve currency it remains far behind the dollar – with the share of only 20 percent.

However, the current dollar crisis can increase the popularity of the euro. The bosses of forty most important central banks are of this opinion. According to UBS survey, 80 percent of them believe that The dollar will remain a dominant currency, but you can see clear signals for diversification of reserves – and this euro is to be the main beneficiary.

The head of the European Central Bank Christine Lagarde even talks about the “global moment of the euro” for Europe. Changes in American foreign and commercial policy give Europe a chance to take over the helm. However, so that the euro could fully use its potential, Europe must build a strong union of capital markets and provide a sufficient number of safe assets – e.g. through joint debt for defense purposes. Foreign central banks would gladly increase the share of euro in reserves, but there is a lack of a large number of high -quality debt papers denominated in euros. For comparison – against $ 29 trillion American tax bonds we have only 3 trillion of euro bonds on the Old Continent with similar credibility, most of which are German papers.

Chinese Juan – a shadow of economic power

From the point of view of the economic power, China and their currency Juan should also play a greater role. Last year, China was responsible for almost a third of global GDP growth, and their economy is comparable to the entire EU. More and more Chinese foreign trade is settled in Juan. Raw raw materials are sold in Juan, even if China does not take part in the transaction – e.g. India and Pakistan pay Russian oil suppliers in Juan instead of dollar. Despite Beijing's efforts in favor of the internationalization of the Currency Juan as a reserve currency, it practically does not count – his share recently fell to just over 2 percent.

In order for Juan to play a global role, China would have to open their capital market. Only when assets can be freely bought and sold, investors and central banks will be ready to invest more in Chinese papers. However, the full opening of the market also requires full currency convertability and liquid courses – and Beijing is still not ready.

Japanese yen and the British pound are also not alternatives to the dollar. Their economies are too small and are rather on the relegation path.

Conclusion: the dollar is worse than ever, but there is still a real successor on the horizon.

The above text is a translation with Swiss portal handelszeitung.ch