ABSTRACT
The dollar presently reigns supreme as an international currency. Can its dominance be challenged? Many observers foresee the rise of significant rivals for global currency leadership: the euro; possibly a revived yen; perhaps, in the longer run, even the Chinese yuan. My aim in this essay is to assess the prospects of the greenback’s main competitors and implications for the broader monetary system. Do any of the dollar’s potential rivals represent a truly serious challenge?
Like many others, I accept that the global position of the dollar is weakening. Essential to the greenback’s dominance until now has been a widespread and remarkably durable faith in the currency’s value and usefulness. Sooner or later, confidence in the dollar is bound to be undermined by the chronic payments deficits of the United States, which add persistently to the country’s looming foreign debt. But that by itself will not ensure the success of some alternative. The decline of one currency does not automatically guarantee the ascendancy of another. In fact, potential challengers have considerable deficiencies of their own, which are likely to limit their appeal, too. There is no obvious new leader lurking in the wings, an understudy just waiting to take center stage. So what, then, should we expect? We should anticipate something like the
interregnum of the period between the two world wars, when Britain’s pound sterling was in decline and the dollar on the rise, but neither was dominant. Coming years, I submit, will see the emergence of a similarly fragmented monetary system, with several currencies in contention and none clearly in the lead-an increasingly leaderless mix of currency relationships. We know that the absence of firm monetary leadership during the interwar period was a contributing factor to the financial crisis and Great Depression of the 1930s. The economic and political impacts of a leaderless monetary system in the twenty-first century could also be considerable. I begin with a brief review of prospects for the dollar, setting the stage for
the analysis to follow. Contrary to the more sanguine views of observers such as Harold James (2009) or Ronald McKinnon (2009), I do not consider the persistent buildup of America’s foreign debt as sustainable for long. Unless reversed by significant policy reform in Washington, the U.S. economy’s
dependence on foreign capital must be expected in time to erode the advantages historically enjoyed by the greenback, creating an opportunity for possible challengers. Three currencies are most frequently mentioned as potential contenders
for the dollar’s crown-the euro, yen, and yuan. Prospects for each are considered. Overall, my assessment is skeptical. None of the three candidates appears capable of mounting a serious challenge to the dollar; certainly none is likely to surpass the greenback in the foreseeable future. Rather, the more plausible outcome is one in which the dollar’s supremacy is eroded but no other single money emerges to replace it. In the language of Jonathan Kirshner (2009), the dollar will become one of several “peer competitors” in a fragmented currency system, with no dominant leader. I then turn, in conclusion, to the implications of a fragmented currency
system for international monetary stability. A heightened struggle for leadership seems probable, threatening an increase of tension in currency affairs. Much will depend, however, on how aggressive policymakers choose to be in promoting their respective monies. The most likely battlegrounds are the Middle East, where the dollar and euro will contend for supremacy, and Asia, where the greenback can expect determined efforts on behalf of both the yen and the yuan. In both locales, the most likely outcome is intensified rivalry but not outright conflict.
