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5 Things to Affect the Dollar as a Global Commodity

Adam Lienhard

The US dollar has been the world’s primary reserve currency since World War II. It has played a significant role in global trade. However, the dollar’s global foreign exchange reserve share has declined, dropping below 60% in Q4 2021 due to the growing use of alternative currencies. Learn more about factors that may influence the US dollar hegemony in the years to come. 

Yuan becomes popular

The international monetary system, which has long been dominated by the US dollar, is currently experiencing a shift. The use of the Chinese yuan continues to rise in global trade. It is noteworthy that nations such as Russia and Iran, who are subjected to sanctions, have taken to adopting the yuan as a feasible alternative currency for trade instead of the dollar.

Gold is a safe haven

The growing interest in gold as an alternative asset in emerging countries reflects a shift in global monetary reserve strategies. Previously, countries mainly relied on the US dollar and other major currencies as assets for foreign reserves, but recently, countries have begun to look for alternatives.

Gold serves as a store of value for foreign reserves during difficult economic times and inflation. The use of gold as an alternative asset depends on several factors, including political and economic stability, inflation and bond yields, exchange rate and currency fluctuations.

Emerging countries (such as Russia, China, and India) have recently started to increase their gold reserves. It can help countries diversify their portfolios and reduce dependence on the US dollar and other major currencies.

Gold is also used to support local currencies in emerging countries, especially in cases of currency depreciation, as happened in some other countries like Zimbabwe.

The euro is on the rise for international transactions

Did you know that the euro is the second most widely used currency in the world after the dollar for international payments and financial transactions? It holds a significant position in the global financial system, representing around 20% of global foreign currencies and international debt.

The European Union is striving to boost the role of the euro by enhancing its infrastructure and urging companies to use it for international trade and foreign investments. Experts suggest that the euro could gain from trade tensions between the US and China, as European firms can opt for the euro over dollars while conducting business with China.

Growing dependence on cryptocurrencies

The role of cryptocurrencies in challenging the US dollar’s standing as the world’s dominant currency is growing. Among these digital assets, Bitcoin has gained significant attention in recent years. 

Decentralized and based on blockchain technology, cryptocurrencies offer several advantages including privacy, security, and transparency. They can be used for online payments and money transfers without relying on traditional banks or financial institutions, making them a valuable tool for international trade with fast, secure settlement options.

In recent years, we have seen some developing countries officially adopt cryptocurrencies as legal tenders, like El Salvador and the Central African Republic. El Salvador made Bitcoin a legal tender in 2021, where it can be used for all commercial transactions and money transfers. The government has added Bitcoin to its foreign currency reserves.  

The rise in cryptocurrency prices is a clear indication of the growing confidence and competitiveness of this digital currency. The involvement of large corporations and investors is expected to further promote the adoption and growth of cryptocurrencies, thereby fostering greater competition in the market.

The growing influence of the BRICS countries

The BRICS group, consisting of Brazil, Russia, India, China, and South Africa, is advocating for the adoption of a shared currency. The suggestion was put forward by Russian President Vladimir Putin in June 2022 and has since gained traction amidst discussions about reducing the dominance of the US dollar.

Creating a shared currency within the BRICS nations would enhance trade and investment ties while decreasing reliance on the US dollar. This move would also boost their influence in international negotiations.

A BRICS currency will undoubtedly be bolstered by the gold and commodity reserves of its member countries, thereby creating an exceptionally stable and trustworthy currency. This initiative signifies their determination to reshape the global economic landscape.

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