The Gradual Waning of the US Dollar's Supremacy: Three Key Factors

For several decades, the US dollar has held the prestigious position as the world's reserve currency, playing a crucial role in global trade. However, the supremacy of the dollar is facing challenges due to a combination of economic and political factors. Here, we explore the three key reasons why countries around the globe are seeking alternatives to the dollar.

1. The Undue Influence of US Monetary Policy

As the issuer of the world's reserve currency, the United States has an outsized influence on the global economy. Countries around the world must align their economic and monetary policies with the US to avoid a spillover effect on their economies, often leaving them at the mercy of American monetary policies.

Such a position grants the US what former French President Valéry Giscard d'Estaing referred to as an "exorbitant privilege." Not only does this mean that the US could circumvent potential debt crises by issuing more money, but it also means other nations are dependent on the health of the US economy.

Several countries, including India, have expressed their frustrations with this undue influence, with some even labeling the US as an irresponsible issuer of the world's reserve currency. India, for instance, is advocating for using the Indian rupee for trade, aligning with Prime Minister Narendra Modi's vision for the country's currency.

2. A Strong USD Becomes Burdensome for Emerging Economies

The strengthening of the US dollar against other global currencies is increasing the cost of imports for emerging economies. For instance, Argentina faced a decline in its US dollar reserves, causing the Argentinian peso to depreciate and trigger inflation. In response, Argentina has started paying for Chinese imports using yuan instead of US dollars.

A strong USD not only strains developing economies but also lessens its appeal as a reserve currency. As access to USD becomes more expensive, borrowers are compelled to seek alternatives.

3. Structural Shift in Global Trade and Oil Demand: The Petrodollar at Risk

One of the reasons behind the dollar's status as a global reserve currency was the Gulf countries' decision to trade oil in USD. This arrangement, known as the petrodollar system, was formalized in a 1945 deal between Saudi Arabia and the US, wherein the former agreed to sell oil to the US exclusively in dollars.

However, this system faces challenges due to the diversification of global trade and oil demand. With the US becoming energy independent and a net oil exporter due to the shale-oil revolution, the conventional petrodollar system is being reevaluated. Moreover, diplomatic tensions between the US and Saudi Arabia raise further questions about the longevity of the petrodollar system.

All these factors contribute to an increasingly diversified global economy where the dominance of the US dollar is gradually being eroded. This is driving nations to seek alternative currencies and payment systems, marking a significant shift in the global economic landscape. The era of unchallenged dollar supremacy appears to be giving way to a multipolar currency world.