Even in the absence of geopolitical and economic upheaval, the dollar’s role as the world’s reserve currency is likely to weaken in the future. This is stated in the report of the Swiss bank Credit Suisse “The Future of the World Monetary System”, with which RBC is familiar.
The expansion of floating exchange rates, the desire of central banks to reduce the risks of possible sanctions, as well as the availability of currency swap lines between central banks will contribute to the weakening of the dollar’s position as a hegemonic currency with the world
As a result, the world financial system will become multipolar, but the dollar will still not lose its dominant role. The creation of an effectively functioning single global currency, or the emergence of a new world hegemon from existing currencies, is considered unlikely by Credit Suisse economists.
How the financial system will develop in the world
Credit Suisse economists consider three scenarios for the possible development of the world’s financial system. The main, or base scenarios, they consider the most realistic. The other two scenarios, at least at the moment, are highly unlikely to happen in practice. What is the essence of the three scenarios.
Basic scenario: Multipolar financial system
The current financial system will change gradually and over time will develop into a more multipolar one, according to Credit Suisse. This will be facilitated by the growth of trade in national currencies, the development of regional capital markets and the availability of insurance mechanisms against shocks caused by US monetary policy. For example, such a mechanism could be the pool of reserve currencies created by the BRICS countries.
In addition, the trend of diversification of the assets of the largest central banks of developing countries will continue. All of this will lead to a gradual decline in the dollar’s role as a reserve currency, but is unlikely to end its dominance, analysts predict.
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Second scenario: Creation of a single global currency
The idea of creating a single world currency is not new – its introduction was proposed, for example, by the English and Canadian economists John Maynard Keynes and Robert Mandel. And the former managing director of the People’s Bank of China, Zhou Xiaochuan, pointed to the potential of SDRs (the IMF’s special drawing rights) to become the basis for a new system of global payments.
Transferring the rights to issue money from either country to a supranational body requires a huge amount of trust, which is only possible in a political union (as, for example, in the case of the creation of the euro). In the current geopolitical environment, this is highly unlikely to happen globally, the report found.
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Third scenario: The hegemon currency should be one of the existing ones
Economists at Credit Suisse have concluded that this option is unlikely to happen, at least in the near future.
There are two regions comparable in size to the US – the Eurozone and China. In favor of the euro is the fact that it represents about 20% of foreign exchange reserves (first in terms of volume and share after the dollar) and that it is a freely convertible currency.
However, the European authorities in charge of monetary policy clearly do not want the euro to replace the dollar in the world – their policy is aimed exclusively at the development of national economies. In addition, the EU does not have a secure financial asset for the entire region such as US Treasuries, nor does it have an integrated capital market and banking union.
In China, by contrast, all major banks can be seen as a single institution. But the yuan lacks the essential quality needed to compete with the dollar – being a freely convertible currency. It is unlikely that China will fully open its financial markets in the near future, and this is the main reason why foreign currency reserves in yuan in the world are so small (about 2.8%), says the report of Credit Suisse, writes RBC.