Dollar Dominance Will See ‘a Slow Erosion’, Not a Paradigm Shift

  • US dollar dominance will decline over time but it will be ‘a slow erosion’ rather than a ‘paradigm shift, according to Fitch Solutions. 
  • It will take a long time for any other currency to usurp the dollar, Cedric Chehab told CNBC. 
  • He cited China’s economic might, diversification of global trade flows and digital currencies as factors that pose threats to the greenback.

The US dollar’s dominance of global trade and investment flows will decline over time – but it will be “a slow erosion” rather than a “paradigm shift” because there still isn’t much of an alternative to the greenback, according to Fitch Solutions. 

The greenback’s hegemony is supported by its status as the world’s reserve currency, as well as the US’s dominant share of foreign-exchange transactions, trade, SWIFT payments and dollar-denominated debt.

 “And in that sense, there’s not really an alternative if you think about it,” Cedric Chehab, global head of country risk at Fitch Solutions, told CNBC on Sunday.

Over time, the dollar’s supremacy will face threats from factors such as the continued rise of China’s economy, Russia and other countries looking to de-link from the US-led financial sector, and the possibility of central bank digital currencies, according to Chehab.

But he maintained that “it’s going to take a long time for any other currency, any single currency to really usurp the dollar.” 

“Any reduction in the status of the US dollar is going to be a slow erosion rather than a paradigm shift. So we’re gonna see that dollar dominance erode over time. That’s because China is the largest trade partner of most economies, and as its economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade, etc,” he said. 

There has been growing de-dollarization rhetoric from leaders of BRICS countries – Brazil, Russia, India, China, and South Africa – in recent weeks. And US Treasury Secretary Janet Yellen recently said sanctions against Russia could hurt the dollar as countries like Iran and China seek alternative currencies for trade, but she said that it would be challenging to replicate the dollar’s dominance. 

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