The US dollar is the most popular currency in the world and the main reserve currency used worldwide. The US dollar is often referred to as “the US dollar” relative to green. For traders who wish to purchase assets in the United States or the United States, the US dollar is usually the preferred medium. When risk aversion rises, traders usually consider buying US Treasuries, which will generate demand for US dollars. The US dollar remains the main global reserve currency, accounting for approximately 60% of central bank reserves. In the foreign exchange market, approximately 80% of commercial transactions involve US dollars. This is the current situation.
Everything has a downfall. US dollar is facing some serious issues regarding its position. Here are some facts which may start the downfall.
Other growing economies
In the 1970s and 1980s, Japan was widely regarded by intellectuals and the American public as the most dangerous economic threat to the United States. Although the yen has appreciated steadily after the United States abolished the Bretton Woods system, Japan’s aggressive export-led growth has caused concerns in the United States. American consumers believe that the Japanese government’s assistance to knowledge-intensive manufacturing is unfair and anti-competitive, leading to trade imbalances between the two. In the early 1990s, more than a quarter of Americans believed that Japan was the most powerful economic power globally, and more than half of Americans believed that this economic power poses a greater threat to the United States than the Soviet army.
But today, a small amount of yen is a reliable competitor to the dollar. After the bursting of the stock and real estate bubbles in the early 1990s, Japan’s economic growth slowed, and the inflation rate dropped to almost zero. In 1999, the Bank of Japan reduced short-term interest rates to a minimum of zero and implemented quantitative easing two years later. As these efforts failed to improve the country’s economic situation, Japan was lost for ten years, spanning two decades.
Beginning in 2012, Prime Minister Shinzo Abe’s widely acclaimed package of loose monetary policy, fiscal expansion, and structural reforms stimulated the return of low inflation and boosted the value of stocks. However, Japan’s GDP growth is still insignificant, and as the population decreases, the debt-to-GDP ratio is approaching 250%, corporate culture reforms are slow, and the near-unprecedented central bank monetization in terms of debt is justified. The long-term dynamics of the Japanese economy feel pessimistic.
In total, foreign countries hold more than 6 trillion US dollars in debt. The two largest countries are China and Japan. If they get rid of the national debt, it may cause panic and lead to economic collapse. China received nearly $1 trillion from the US Treasury. 9 China pegs the renminbi to the U.S. dollar. 10 This makes the prices of its exports to the United States relatively cheap.
In turn, Japan owns more than 1.2 trillion US dollars in US Treasuries. It also hopes to keep the yen low to stimulate exports to the United States. Japan is emerging from a 15-year downturn. The 2011 earthquake and nuclear disaster did not help.
The economies of Japan and China depend on American consumers. They know that if they sell dollars, their actions will further depreciate the dollar. Therefore, the price of their products (still priced in RMB and Japanese Yen) will be relatively high in the United States. Their economy will suffer. At present, it is still in their interest to maintain dollar reserves.
China and Japan recognize their weaknesses. They sell more products to other increasingly wealthy Asian countries.
Therefore, US officials believe that in response to the Covid-19 blockade, they can print an unlimited amount of dollars without damaging the reserve currency position, allowing the country to withstand huge deficits without obvious consequences. However, a new class of competitors is emerging: cryptocurrencies. Cryptocurrencies like Bitcoin operate on a peer-to-peer network that is not restricted by any state, and their advocates advocate it as a decentralized, democratic alternative.
This epidemic makes these coded sounds look
like pure digital noise. Fearing that the central bank, led by the Federal Reserve, would devalue its currency, many people bought bitcoin in large quantities. Since March, its price has more than quadrupled, making it one of the top investments in 2020.
Since its launch in 2009, Bitcoin builders have been seeking to establish it as “digital gold,” a trusted value store that can provide a safe haven in difficult times. However, skeptics find it difficult to invest in highly secure assets safely: the last Bitcoin bubble appeared less than three years ago, and its daily price is still four times higher than that of gold.
Among those who did not use digital technology to grow up, skeptics are particularly represented. They tend to buy gold, which was purchased to prevent standard coins’ prices from falling for hundreds of years. In a recent survey, only 3% of baby boomers said they own a cryptocurrency, compared with only 27% of millennials. However, these numbers are rising, and there is reason to believe that this Bitcoin push has deeper roots.
The dollar is at a turning point. Last year, after decades of rising, the US debt to the rest of the world exceeded 50% of its economic output. This threshold usually heralds an impending crisis. Since then, these debts have risen to 67% of the early warning output value due to a large amount of government borrowing locked in. When the rest of the world begins to lose confidence that the United States can continue to pay its bills, the US dollar rule may end. This is how the dominant currency fell in the past.