Can the dollar stay on top?


The dollar holds its position as the world's reserve currency, underpinning the global economy. But could political instability during an election year disrupt this status? Possibly, although no viable alternative has emerged yet. According to Eswar Prasad in Foreign Affairs, "the dominance of America's currency is harder than ever to overturn." Despite other countries' dissatisfaction with the financial power exposing their economies to U.S. policies, the gap between the dollar and any potential rival has only widened and shows no signs of closing.

Commentators have shared their views on this topic. Steven B. Kamin and Mark Sobel, writing for the Financial Times, argued that "the biggest threat to dollar dominance is American dysfunction." The dollar draws its strength from the U.S. economy, which accounts for 25% of global GDP. However, if political dysfunction and unsustainable national debt continue, dollar dominance could be the least of America's worries.

The Economist pointed out that "what is striking about America is how immune its markets appear to be to the threat of political dysfunction and fiscal frailty," even as other economies struggle. For now, America stands as the "world economy's only bulwark." Nonetheless, this could be undermined by ongoing political dysfunction and reckless fiscal policies in Washington.

Looking ahead, there are signs that investors are becoming cautious about the dollar. According to The Wall Street Journal, central banks around the world anticipate an increase in global reserves of gold over the next year, viewing it as a safer asset. An official at the World Gold Council noted that "extraordinary market pressure, unprecedented economic uncertainty, and global political upheavals have kept gold front of mind for central banks."

When investors diversify away from the dollar, they often turn to "nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and Nordic currencies," as noted by economists at the International Monetary Fund. If the dollar loses its dominance, it will likely be a gradual process, yielding to a more prominent role for these well-managed, smaller economies.  

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