The days of a unipolar world order, in which the United States as the hegemonic power politically, economically and militarily determined world events, are over. Although the United States has the largest military and gross domestic product, the world is increasingly drifting towards a multipolar world order. This should mean that power is spread much more widely across multiple parties, with Asia likely to play a particularly dominant role. In this context, the question arises as to how the US dollar will evolve over the next few years.
How dominant is the US dollar?
In international currency trading, approximately 70% of the US dollar is involved as currency. Or to put it another way: of the ten largest currency pairs, seven include the US dollar. As a reserve currency for other economies, the US dollar clearly ranks first with 60%. Far behind is the euro, whose share as the world’s reserve currency is around 21%. In short: in no other “discipline” does US dominance carry more weight than in the currency category.
The fact that the United States is the most powerful nation in the world, despite its growing economic lag behind China, is mainly due to its impact on exports: the US dollar. The foreign demand for US dollars ensures, among other things, that the greenback remains very stable despite the expansion of the money supply to date. For prosperity and military security to be maintained, the United States, as a business, must be particularly efficient in distributing and marketing its own currency.
Thesis: Dollar dominance will fall below 50% by 2025
The emergence of stronger competing products (alternatives to the US dollar), a growing loss of confidence (unconditional access to foreign exchange reserves) and declining quality characteristics (stability in value or absence of high inflation) exert pressure rising on the US dollar.
This leads to the thesis that the share of the US dollar in global reserve currencies will fall from 60% to less than 50% by 2025. The share in current exchange transactions could also drop from 70% to less than 60 , or even 50%. Of course, this is pure speculation, but the numbers are intended to support a trend based on subsequent observations.
Not your central bank, not your money
The motto of Bitcoin enthusiasts is: Not your keys, not your coins. The statement plays on the importance of self-custody of digital assets. This is intended to emphasize the independence of intermediaries. As we can see from the example of Russia, what applies to Bitcoin investors also applies to states. Finally, the United States froze all Russian reserves in US dollars. A blow for the despot Putin, who can no longer access his deposits in US dollars.
Unlike Bitcoin, there is always an intermediary with fiat currency as a last resort, and this is called the central bank. Thus, each country is always exposed to a counterparty risk with a foreign currency. Due to the precedent set by Russia, many other countries that have strained relations with the United States or fear sanctions will likely tend to reduce their US dollar reserves in the future. This would result in a weakening of the US dollar. On the other hand, the question arises: where else to put the money? After all, as a state, you don’t solve your addiction by switching to another fiat currency. Damage to the United States, significant as it is from freezing Russian reserves, will likely be limited for now.
Fighting inflation is the best marketing
The fact that the United States is now implementing a tighter monetary policy than the euro zone could also have a link with current inflation in the context of key currencies. In order to continue to be able to export many US dollars, it must have basic value stability. In order to remain the “world champion of exports”, the US central bank must, among other things, take stronger countermeasures against inflation than the European and Japanese central banks. A determined fight against inflation is always a strong marketing signal that our currency can continue to be confident in the future.
When states discover bitcoin
For more than 15 years, Russia has significantly expanded its gold holdings. In the context of the war of Russian aggression, the increase seems logical in retrospect. For states, gold is the only monetary substitute for their own national currency that does not involve third party risk. Of course, this could also be said of other precious metals and commodities, but these are less suitable as a store of value or substitute for money than gold.
With the “Russian trigger”, Bitcoin could therefore play a strategically important role in the diversification of foreign exchange reserves. In order to further emancipate from the US dollar, there could also be increased demand for bitcoins from states as a reserve of assets in addition to gold. Not only does Bitcoin offer inflation protection, but it also does not depend on the goodwill of other countries.
Moreover, through experiments like in El Salvador, Bitcoin loses its dangerousness for the state. The chances of Bitcoin replacing a stablecoin like the US Dollar or Euro in the foreseeable future are very low due to its far too high volatility. In El Salvador too, people rarely pay with Bitcoin. Instead, they prefer the US dollar, which serves as a substitute for the national currency which no longer exists. From this, in turn, the thesis can be inferred that US dollar stablecoins can help cement the reserve currency status of the US dollar there. This applies in particular to regions in which cryptographic infrastructures are already used more intensively.
High dependency, low risk: Latin America drives Bitcoin forward
The value stability and half-life (time until the next currency reform) of most Latin American fiat currencies are just too abysmal. Besides the often structurally weak economy, this is certainly one of the reasons why the US dollar is so present in countries like El Salvador. It is precisely this combination that could explain why countries like Honduras or Mexico also want to jump on the bitcoin bandwagon.
US currency watchdog Jerome Powell and his predecessor, current US Treasury Secretary Janet Yellen, are not only under Bitcoin pressure from Latin American countries. Even more threatening is the fact that the share of the US dollar in commodity transactions – again accelerated by Russia – continues to decline. China is also moving further and further away from paying for commodity transactions in US dollars.
Digital US Dollar: Product Optimization
It is all the more important for the United States, in addition to good monetary policy, to create global standards in the field of digital fiat money. They already have a lot of success with this. The proportion of stablecoins with a base value in US dollars is over 90%. Tether (USDT) in particular is therefore an involuntary export hit by the US central bank, even if the initiative and implementation comes from the private sector. Finally, when physically backed by US dollar deposits such as deposits or government bonds, US dollar stablecoins create additional demand for US dollars.
Most Eurozone crypto traders have already created additional foreign demand by holding USDT or other US dollar stablecoins. The tokenization of the US dollar, both as a stablecoin and, in the future, by the state as a CBDC (digital central bank currency), could thus become one of the most important means of maintaining the key currency status.
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