The US authorities are sure that their national currency may decline under particular conditions. However, even in the worst-case scenario, it will suffer minimal damage. In the foreseeable future, the US dollar will hardly see fierce competitors. In this light, the currency will maintain its leading position in any case. Notably, the share of dollar payments may insignificantly drop.
Colin Weiss, an economist in the Global Financial Flows section in the International Finance division at the Federal Reserve Board of Governors, presented three scenarios of the greenback’s future. At the very beginning of the document, the author emphasizes that the status of global currencies directly depends on geopolitical factors. Colin Weiss has identified two ways of selecting a reserve currency by most countries. “First, a country may choose to hold its FX reserves in a currency in return for security guarantees from the issuing country. Second, countries may choose to hold FX reserves in a given currency to signal support for the political aims of the issuing country.”
Describing the possible scenarios, Colin Weiss took into account an expected decline in the US dollar share in FX reserves in favor of the Chinese yuan. What is more, the US dollar share of export invoicing may also drop. However, in both cases, the decrease could be insignificant of just 0.5 percentage points and 1 percentage point respectively.
Under the second scenario, the US dollar's dominance will be affected by “China’s desire to diversify its reserves away from the US dollar.” The economist supposes that the likelihood of lower dollar reserves in 43 emerging countries of Africa, Central Asia, Latin America, and the Middle East is really high. The fact is that these states do not have a formal military alliance with the United States. Even if they have some military ties with Washington, they also cooperate with Beijing and Moscow.
