After the Dollar, What Will Be the Next International Currency?

Matt Kuenzel
6 min readNov 23, 2022

Dominance of the U.S. dollar in international trade and finance

Bank deposits
Loans
Share of currencies used in international payments 2021

Dominance of the U.S. dollar as a reserve currency

The movement to dethrone the U.S. dollar as the world’s dominant currency

“As leaders of the Group of Eight rich nations and the major developing powers traveled to Italy for a three-day summit starting on Wednesday, it seemed unlikely the currency debate would get a specific mention in summit documents.

But both G8 member Russia and emerging power Brazil — which like China and India is a member of the “G5” that joins the second day of the summit on Thursday — echoed China’s calls for the currency debate to be taken up by world leaders.”

— Reuters, 2009

“U.S. allies, looking to buck American control over international trade, are developing alternate systems that don’t rely on U.S. currency.

The catalyst was the Trump administration’s decision last year to reimpose trade sanctions on Iran after pulling out of the 2015 nuclear-weapons deal. The U.K., Germany and France didn’t support the sanctions, which include a ban on dollar transactions with Iranian banks. So they are fine-tuning a system to enable companies to trade with Iran without using dollars.

India wasn’t happy either. Iran is a longtime trading partner, and India wants Iranian oil. India began using a similar alternative system in November, and shipping records show it already is being used by international companies to trade with Iranian businesses subject to sanctions.

China and Russia, also eager to break free of U.S. control, are promoting their own alternatives to the global bank-transfer system, which the U.S. effectively controls, and are striking deals to trade with yuan and rubles instead of dollars.”

— Wall Street Journal, 2019

“Few topics have generated as much discussion in recent weeks as the evolving role of the U.S. dollar in the global trade and capital regime. The sanctions imposed on Russia by the United States and its allies have demonstrated the immense geopolitical power that control of the global currency system can confer.

These same sanctions also make clear, however, why the governments of other countries that might one day be subject to such penalties are doing all they can to opt out and establish an alternative global currency system — either one they control or one that is unlikely to be controlled by potential adversaries.”

— Carnegie Endowment for International Peace, 2022

“Governments around the world have sought to stabilize their currencies and defend their economies against the Federal Reserve’s rapid interest rate increases, which have tilted the field in favor of the dollar. Their efforts highlight both the interconnected nature of the global financial system and its vulnerabilities.

The Fed has raised rates five times this year and is expected to make further moves as inflation remains high in the United States. The rate increases have lifted the returns on offer to investors buying U.S. assets, drawing money into America and strengthening the dollar. Since the U.S. economy is on firmer footing compared with the rest of the world, investors worried about a global downturn are also pouring money into the world’s largest economy — making the dollar even stronger.

As a result, the currencies of other countries — which are valued in relation to each other — have weakened, upsetting markets in some of the largest economies in the world, from Japan and China to India and Britain.

Part of the impact of the Fed’s moves on other regions is economic. A weaker currency means that it costs more for a country to import food, energy and other goods. That adds to domestic inflation, hurts households and could contribute to a global downturn.

The surge in the dollar’s value has also made it harder for foreign borrowers who have debt denominated in U.S. currency to repay their loans. And, as investors have funneled cash away from their own countries and into the United States, the yields on foreign sovereign bonds — which are indicative of the cost of borrowing for foreign governments — have increased.”

— New York Times, 2022

Two possible replacements for the dollar, the Chinese Yuan, and Bitcoin

“Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.”

— Wall Street Journal, 2022

“Central banks may shift their international reserve holdings in order to protect themselves ex-ante against the risk of financial sanctions by fiat reserve currency issuers. For example, from 2016 to 2021, countries facing a higher risk of US sanctions increased the gold share of their reserves more than countries facing a lower risk of US sanctions. This paper explores the potential for Bitcoin to serve as an alternative hedging asset. I describe a dynamic Bayesian copula model to simulate the joint returns of Bitcoin and other reserve assets under a wide range of plausible sanctions probabilities. Assuming mean-variance preferences, a modest risk of sanctions significantly increases optimal gold and Bitcoin allocations. If a central bank cannot acquire sufficient physical gold to hedge its sanctions risk, the optimal Bitcoin share rises further, suggesting that gold and Bitcoin are imperfect substitutes. I conclude that sanctions risk may diminish the appeal of US Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of both cryptocurrency and gold.”

—Matthew Ferranti, Department of Economics, Harvard University, 2022

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