Nobel laureate Robert Mundell once said: “Great powers have Great currencies” – It can very well be restated in the contemporary world as: “Great Currencies make Great Powers”.

US Dollar’s dominance continues to prevail by being the most reliable currency anchor over the last eight decades .

International monetary system requires production and distribution of safe assets -The U.S. has been at the core of that system and enjoying benefits, but the rest of the world has also benefitted by deploying Its savings in safe assets . Strong global demand for the dollar-denominated assets remains as the biggest driver of the United States’ persistent trade deficit and long-run decline of U.S. manufacturing

In the recent times , there have been discussions about an imminent end of International Financial Supremacy of the Dollar and the likely onset of De -Dollarisation wave.

These calls have been made on account of various extraneous reasons but the following factors stand out in mostly in common:

· Concerns about America’s ginormous debt mountain and how it could spell trouble ahead

· Unease at the US government’s overt “weaponization” of the Dollar, as U.S. continues to leverage its financial power to punish adversaries, the recent being freezing of Russian reserves in the wake of Russia-Ukraine war.

· Emergence of a more decentralized era in global finance with cryptocurrencies and Central bank Digital currencies.

Most of these prophesies and wishes proved wrong. Fundamentally US hegemony had changed levers of direct forms power from inter-governmental channels to indirect forms of private markets.

We would examine these factors to find whether there could be any far-reaching impact on the Centrality of US Dollar in the global financial system.

US Debt and Deficits

Stance on spiralling US debt seems to be a choice between hyperbolic claims of imminent collapse and a Panglossian view that the debt is not a concern.

Years of elevated budget deficits, have taken the debt to the historically high levels 330% of GDP. But the rising debt and deficits are not unique only to US. Across the global economy, Governments owe an $91 trillion, an amount almost equal to the size of the global economy.

By being the major reserve currency of the world, the current level of debt will not lead to a default or result in US Dollar losing its dominant role in the global economy but will likely impose eventual costs in the form of lower growth and higher inflation.

There has ever been any debt crisis when the debt is in the country’s own currency except France of 1926.

Weaponisation of Dollar

There has been a discussion which suggests over stretched reliance on sanctions to coerce other countries is gradually losing its effectiveness and slowly degrading the most influential tools. Several countries are resorting to bilateral currency arrangements. But these are too insignificant to dethrone US$.

The modern-day paradigm necessitates a return of Cold War logic in which economic relations align with security relations.

Technological Innovations

Technological innovations outpace payment and regulatory innovation and lead to a situation where trust in technology replaces trust in sovereign nations. Central Bank Digital Currencies (CBDC) and cryptocurrencies with their blockchain technology are an example.

Despite their initiatives, none of the top seven currencies that represent more than 95% of global reserve currencies have not yet launched a digital version .Even if it sees the light of the day, the role of CBDCs is broadly limited to the areas of cross-border payments.

Beyond lack of oversight, there are some fatal flaws in their monetary economics that prevent Crypto currencies from being adopted and widely accepted as a medium of exchange and as a store of value at a large scale.

Conclusion

It is obvious that any emergence of alternative reserve currency would take years if not decades to evolve as a reserve currency needs the backing of large, open credit markets, strong, diversified financial institutions, robust regulatory and legal framework , cohesive Political system and a central bank cognisant of its global responsibility. History teaches that dominant currencies change infrequently and often over long transition periods.

As such Dominance of US Dollar is set to stay for the foreseeable future

The writer is the Chairman of SYFX Treasury Foundation. Views are personal