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Weakening U.S. currency value over time

US dollar's dominance in foreign exchange reserves worldwide has decreased from 70% two decades ago to 57% at present.

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U.S. dollar's share of foreign exchange reserves has declined from 70% to 57% over the past two...
U.S. dollar's share of foreign exchange reserves has declined from 70% to 57% over the past two decades.

Weakening U.S. currency value over time

Who's fighting the new currency war? Find out what economist Christian de Boissieu has to say about this global battle.

Ever heard of "The New Currency War"?

Well buckle up, cause there's a three-front war going down, and it ain't all brand new.

The first round is about currency values. Countries are trying their damnest to depress their currency to boost their business and exports by practicing something known as competitive devaluation. This might sound familiar, 'cause it was a popular move back in the 1930s pre-WWII. But it's especially relevant today with Steve Mnuchin, Trump's main economic advisor, openly talking about wanting a weaker dollar.

The second round is all about dominance. Countries and economic zones are hustling to control and manage the global reserve currency. The US dollar's hegemony is under threat, famously known as de-dollarization.

Lastly, and this is the new kid on the block: the war between traditional currencies and digital currencies, or cryptocurrencies like Bitcoin, Ethereum, and Tether.

So is there a contradiction between devaluing a currency for competitiveness and striving for dominance as a global reserve currency?

You're absolutely spot on. This is a fundamental contradiction, and it's causing a headache for the Americans. They wanna decrease the value of the dollar to boost its competitiveness. But they still want the dollar to be the dominant reserve currency worldwide and even increase its market share.

For now, the dollar's decline is moderate. But if it continues to drop, there will come a point where foreign investors start to lose confidence, resulting in increased interest rates on US debt. If, for instance, the Chinese, who own a chunk of US Treasury bonds, predict the dollar's decline, they'll demand a premium on their US debt to account for that anticipated decline.

Over the long run, that loss of faith in the American currency could erode its market share. That's the contradiction.

In a de-dollarized world, which currencies could replace the US dollar?

This trend has been in the works for some time now. The decline of the dollar's influence has been going on for years.

If we look at the share of the dollar in global foreign exchange reserves, excluding gold, it was 70% 20 years ago. Today, it's around 57%. So, you can see, it's going down... but very slowly. The euro is in second place with around 20% of the market share. The British pound and the Japanese yen are each at 5%, and the Chinese yuan is at around 3%.

So, at the moment, it's a lopsided duopoly. I should clarify that it's asymmetric because the dollar still has a significant lead over the euro.

In the next decade, I believe there'll be three major currencies: the US dollar will remain at the top, but it will lose some market share. The euro will still be around. And the yuan is expected to pick up market share. So, it'll be a monetary triad, still lopsided in favor of the dollar.

Now, do you think cryptocurrencies are really challenging traditional currencies? Aren't they just financial assets?

Cryptocurrencies like Bitcoin, Ethereum, or Tether can't be considered actual currencies at the moment. They don't perform the transactional role a currency should and are too volatile. Stablecoins, however, could claim that title, but they'd still need to stabilize themselves. For now, they're not.

Without directly competing with traditional currencies, these cryptocurrencies are still shaking things up. We saw this when Facebook tried to launch its private currency project. This move caused a panic among monetary authorities who squashed the initiative.

There was a sudden realization among central banks. Several have decided to develop their own digital currency based on blockchain technology. These digital currencies could, in theory, reduce the costs of international transfers. But we're not quite there yet!

This interview was edited for clarity and conciseness.

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...yeah, we'll get back to you on that one.

  1. The struggle between countries over currency values and global reserve currency dominance has been heightened, with the US dollar's hegemony under threat in the latter case, also known as de-dollarization.
  2. In a de-dollarized world, the euro and Chinese yuan, among others, are expected to gain market share, while cryptocurrencies, though not yet considered actual currencies, are shaking up the industry and causing competition.
  3. A devalued currency for increased business competitiveness could lead to a loss of confidence among foreign investors, causing increased interest rates on US debt and potentially eroding the dollar's market share, creating a contradiction in the overall strategy.

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