According to a paper by Colin Weiss, a senior economist at the Federal Reserve’s Global Financial Flows section, there are three possible scenarios of the erosion of the USD’s role as a reserve currency. The yuan plays the decisive role in these scenarios.
Weiss believes that other major currencies play a key role in further reducing the US dollar’s reserve currency status. Most countries hold their reserves in these currencies in return for security guarantees from the issuing country. He also noted the significant influence of geopolitical factors on USD’s status.
Among such scenarios, Colin Weiss describes a potential reduction of the dollar share in the FX reserves of other countries. Such a drop could be quite massive.
According to Weiss, 43 developing countries in Africa, Central Asia, Latin America, and the Middle East could reduce their FX reserves in USD. These countries are not allied with the US, and many of them have friendly relations with Beijing and Moscow.
China's possible divestment from US dollar reserves is the main scenario that could weaken the US dollar’s role as a reserve currency. Another such scenario is the increase in China’s global influence. In this situation, Hong Kong could remove the peg of the Hong Kong dollar to USD and use the yuan for invoicing some of its trade.
The US dollar would still have a significant role in the global economy under these scenarios, but the confidence of market players in USD would be eroded. Even then, the dollar’s share in global FX reserves would remain high, twice the ratio of other currencies.
Many analysts believe that the global financial system based on the US dollar dominance could face instability. The weakest points of such economies are the enormous national debt and high inflation.
