What is the new position of the dollar in the global economy?

Strategic Council Online—Opinion: The confrontation between Americanization and the Chineseization of the world has created a new acting field. While the Chinese side’s efforts to reduce the international power of the dollar and increase the global acceptance of the yuan have an increasing trend, it is not possible to correctly analyze and scenarioize the possible futures of this confrontation and the new arena of acting by relying on emotional and exaggerated reactions, and of course far from scientific neutrality.

Reza Majidzadeh—Researcher of economics

After World War II, the dollar became the world’s reserve currency, and the Bretton Woods system led to the dollar’s dominance in the world economy. But in the 1970s, President Nixon announced the end of the relationship between the dollar and gold, and as a result, the Bretton Woods system ended. Nevertheless, the dollar still maintained its international credibility. Still, after the financial crisis in 2008 and the European debt crisis in 2011, doubts were raised about the continued position of the dollar as a dominant global currency. At the same time, with the approach of making countries indebted, including covering the European debt crisis, China paid attention to its approach to increasing the yuan’s position.

Four factors have helped China compete more seriously in the new arena of the world’s dominant currency: First, China’s economic growth, which is expected to surpass America’s gross domestic product in the future. However, a new competitor called India has also emerged in this field. But three other factors have increased the possibility of increasing China’s competitiveness in the international currency system.

The second factor is its growing trade with other countries. The ambitious plan of the new Silk Road is almost complete, and the long-term strategy of “Made in China 2025” has also helped to increase the demand for Chinese currency significantly during this expanding trade. Signing currency swap agreements with countries has also helped China to use the yuan in exchanges.

The third factor is the financial system, which, especially after the trade war between China and the United States in the mid-2010s, caused China to strengthen the international position of the yuan by removing the dollar from its stock market transactions. In addition, China opened its financial market to foreign investors and established institutions such as the Asian Infrastructure Investment Bank.

Geopolitics is the fourth factor; The withdrawal of the United States from Afghanistan, the country’s extensive sanctions against other countries, and Trump’s aggressive approach, which is likely to be repeated, are the factors that gave China the opportunity to make its role stronger, although with the same approach of economic diplomacy. The reproaching between Iran and Saudi Arabia in China is an example of this capacity building that China needs to develop its silk road project and other enormous economic and commercial projects.

Nevertheless, the dollar remains the dominant global currency and cannot be expected to lose its dominant position. The volume of trade between China and America is one-tenth compared to the volume of trade between China and the world, and this relationship means that the competition has not yet entered a decisive stage. China’s strategic profile shows that it changes its strategies based on conditions, and the country’s aggressive currency approach has started after the approach of pegging the value of the yuan to the dollar. Therefore, its continuation also depends on the continuation of the economic-commercial-technological competition of the two countries.

On the other hand, the US followed the program to reduce the reference interest rate to cut inflation. In addition, in the main approach of the US, the US Treasury bankrolls financial expenses through the issuance of domestic and foreign bonds; Assets that increase the national debt of the US and, according to the constitution of this country, have a specific ceiling. Currently, Janet Yellen, the US Treasury Secretary, believes that the country’s inability to prevent the increase of these debts will endanger its position as the leader of the international economy and strengthen the possibility of entering a global recession. Although Republicans have taken an opposing stance, the deflationary rule has been effectively abandoned in the debt ceiling negotiations.

The conditions above mean that the future of the competition between the two currencies depends both on China’s ability to continue the “Made in China 2025” strategy and on the US approach to inflation and the country’s national debt issue. Although a country’s national debt does not indicate its weakness and reflects the international credibility of a government, its effect on weakening the value of the national currency can be challenging. But the US is still the world leader in terms of technology. At the same time, you should also pay attention to cryptocurrencies and their development. Just as globalization did not proceed according to probable trends, the competition between China and the United States may mean something other than entering into a new world order, and relying solely on one of the two sides of the competition will be an irrational gamble.