Drooping Dollar May Face Global Reckoning, but Is There a Viable Replacement?

The dollar is in one of its periodic slumps, and talk has been rife that the greenback’s day as the world’s dominant currency is done. Europe, China, Russia and India have talked about finding some alternative. CNN commentator Fareed Zakaria warned recently on his program that the dollar faces “a death by a thousand cuts” that could bring a “reckoning” for the U.S. economy.

Not so fast, says Ian Bremmer, president of the Eurasia Group, a research and consulting firm. In a commentary, Bremmer argued that “rumors of the dollar’s death are greatly exaggerated.”

He pointed to the buck’s continued dominance. While admitting that this lofty status has diminished somewhat this century, as other economies have risen, the dollar’s ubiquity continues—and it remains by far the most “widely used for funding, pricing, trade invoicing and settlement, cross-border borrowing and lending even when the U.S. is not involved.”

To be sure, the dollar has been waning since September 2022, off 10%, as fears of a U.S. recession—and thus a reversal of the Federal Reserve’s campaign to raise interest rates—began to worry global investors. The U.S. currency took another leg down over the past month amid anxiety over the nation’s banking system.

Bremmer noted that other denominations have ruled in the past and then withered. A key example: the British pound in the 1800s. However, “when the pound lost its status, there was another currency on the sidelines ready to take its place,” he wrote: the dollar. “Today, there is no such challenger.” To Bremmer, the European Union is too fragmented for the euro to supplant the dollar, and the Chinese yuan suffers from China’s lack of openness and investor protections.

As the world’s biggest economy during the past century, with the largest and most open capital markets, the U.S. has a powerful advantage, Bremmer declared. Although the dollar’s share of central banks’ $12 trillion foreign exchange reserves has certainly waned since 1999, it is still nearly twice that of the euro, yuan, pound and Japanese yen combined, Bremmer indicated.

Of course, dollar dominance has downsides, Bremmer acknowledged. It makes U.S. exports more expensive and hobbles American competitiveness. Also, it feeds Washington’s reliance on debt, which has ballooned in recent decades.

“Without a viable challenger, it’s very unlikely that the dollar will lose its special role anytime soon—for better or worse,” Bremmer contended. “You can’t replace something with nothing.”