Is time running out on US Dollar as the leading reserve currency?

[sakura]

 

The might of the USD and its position as the leading reserve currency has been called into question by numerous analysts over the years. 

During periods of political and economic uncertainty doubts about the USD attract a wider audience, prompting further proclamations about its demise. 

Some analysts claim a collapse is imminent, others predict that it is just a matter of time and yet it remains the most highly traded currency in forex, the dominant currency in international trading and remains the leading reserve currency. 

It has history on its side and is clearly still trusted by its trading partners. 

But the question of its future warrants consideration as it comes under threat from the EUR and other currencies who may be ready to challenge the USD as the dominant reserve currency. 

TROUBLE FOR TRUMP’S ECONOMIC POLICY 

When US President Donald Trump came to power in 2016 he pledged policies that would propel the value of the USD to new levels. The objective was to boost US structural economic growth while at the same time reducing the US trade deficit. 

Trump’s plan was going to be achieved by making large investments in infrastructure and extensive tax reforms in combination with a highly protectionist trade policy. 

Thus far Trump’s plans have been hamstrung by political division and budget constraints. The US trade deficit continues to grow and there’s been little sign of the promised protectionism. 

Concurrently, doubts about the eurozone’s future, following the Grexit crisis and the shock of Brexit, have receded. Germany’s vision of economic convergence is shared by new French President, Emmanuel Macron, a pro-European reformist, and this axis has rejuvenated the EUR. It is pressing a strong claim, similar to when it was first launched, as a rival reserve currency as foreign investors shift capital into the eurozone. 

If US trade deficit continues to grow while the eurozone finally delivers on its potential, then a sustained period of EUR performance would follow and prove it might be a viable alternative to the USD as the leading reserve currency. It’s one of the key conditions that would make the prospect of a USD collapse easier to accept and navigate through. 

The eurozone is not alone in its ambition to establish the EUR as a reserve currency. China will also look to benefit from uncertainty regarding US’s strength, and Asian countries will be more sympathetic to their offer of a closer relationship. 

Gold has also benefitted from the apparent weakening of USD’s status, recently peaking in value after years of slow decline. 

Bitcoin has the potential to stake a claim, but it’s too soon to be sure if it can accede to the role. 

 

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