COVID-19-Induced Dollar Weakness... Will the Global Reserve Currency Order Change in the Short Term?

[Asia Economy Reporter Eunbyeol Kim] As the prolonged impact of the novel coronavirus disease (COVID-19) weakens the economic power of the United States, opinions are emerging that the dollar-centered global reserve currency order may change. However, according to experts, it seems difficult for the dollar's dominant position to disappear in the short term. This is because assets that could replace the dollar, such as the euro and yuan, have clear drawbacks, and the likelihood of a new asset emerging to replace the dollar in the short term is low.

On the 20th, Sangwon Lee, Deputy Senior Research Fellow at the International Finance Center, stated, "Considering past cases of hegemonic shifts, even if the economic power of the United States weakens, it is difficult for an asset that can perfectly replace the dollar in the international financial market in terms of trust to emerge in a short period," adding, "The possibility of the rapid collapse of U.S. hegemony is low."

Looking at past cases, historically, although the U.S. surpassed the United Kingdom's Gross Domestic Product (GDP) in the early 1870s, it took more than 70 years for the dollar to replace the pound and be recognized as the sole hegemonic currency.

Since the 2000s, doubts about U.S. leadership and the trustworthiness of the dollar representing it have increased whenever a global major crisis occurred. However, the dollar is still recognized as the safest store of value and medium of exchange worldwide, and the U.S. influence in the global financial system remains overwhelming.

Countries around the world still hold the dollar as a reserve currency. As of March, the dollar's share was 62%, while the euro accounted for 20%, and the yuan about 2%. When issuing foreign currency bonds, it is also preferred to raise funds in dollars, which is the most advantageous in terms of cost and liquidity. As of August, this preference stands at about 68%.

Foreign experts also evaluate that claims about the collapse of the dollar's status are greatly exaggerated. Capital Economics stated, "Since the euro and yuan are not yet serious competitors, claims that the dollar's status will collapse are exaggerated." Foreign Affairs predicted, "The era of dollar hegemony without alternatives will continue for a long time."

In particular, currencies that could check the dollar have significant weaknesses. The yuan has limitations such as domestic capital market controls and its unique political system, while the euro faces the limitation of a fragile political foundation within the region. The daily average trading volume of China's yuan-denominated crude oil futures accounted for 10.5% of the global total as of June. Even if the People's Bank of China officially launched the digital currency (DCEP) first among the Group of Twenty (G20), questions remain whether it can gain international trust due to technical issues and other reasons.

However, from a long-term perspective, it is difficult to predict whether the dollar's absolute dominance will continue for over 100 years. Some suggest that as the economic influence of emerging powers like China grows, the international monetary order may be reorganized into a multipolar structure.

Deputy Senior Research Fellow Lee said, "It is also of interest whether the reorganization of the international order into a multipolar system is an intermediate stage of hegemony transitioning to another superpower (Pax Sinica) or whether it will be fixed as a multipolar system for a long time."

He also emphasized, "When central banks of each country choose reserve currencies, geopolitical factors such as alliance relationships are considered as importantly as currency stability, so attention should be paid to the fact that the international security landscape to be built in the future may influence the reorganization of the currency order."

This content was produced with the assistance of AI translation services.