In light of the long dominance of the US dollar as a major global currency, thanks to the enormous size and stability of the US economy, as well as the unprecedented liquidity of its financial markets, both the European euro and the Chinese yuan have emerged in recent years as potential competitors to the dollar.
However, a recent report issued by the American “Eurasia Review” website indicates that the structural and political challenges facing the euro and the yuan prevent them from becoming reliable alternatives to the dollar in the near future.
Dollar dominance
The US dollar maintains an unparalleled primacy in the global financial system, representing approximately 58% of the world’s foreign exchange reserves according to a 2023 report.
This is mainly due to:
- The sheer size of the US economy, worth more than $25 trillion.
- Political stability in the United States.
- The extraordinary liquidity provided by US financial markets.
These factors combined ensure the continued strength of the dollar in international trade and finance, making it the first choice for economic parties around the world.
Euro attempts to compete with the dollar
The Eurasia Review website points out that the euro, despite its political and economic strength within the framework of the European Union, suffers from structural obstacles that prevent it from being a real competitor to the dollar. Despite the support of stable European institutions for it, the political divisions between European Union countries, in addition to the differences in financial policies between them, remain a major obstacle to its rise as a global reserve currency.
In 2023, the euro’s share of global foreign exchange reserves was only about 21%. Despite the major step represented in issuing consolidated debt worth 400 billion euros during the Corona crisis, the financial markets in the euro area still lack the depth and liquidity that characterize their American counterparts, which limits the euro’s ability to achieve a stronger position on the global scene.
The rise of the yuan
The Chinese yuan has witnessed remarkable progress in its economic role at the international level, as its share in global payments increased from 3.71% in 2023 to 8% in 2024, according to the SWIFT report.
This rapid growth reflects China’s increasing economic position in international trade. However, the main obstacles hindering the adoption of the yuan as a reserve currency include the Chinese government’s strict control of capital and a lack of transparency in financial markets.
Moreover, the centralized political power wielded by the Chinese Communist Party increases the reluctance of other countries to embrace the yuan as a reliable alternative.
Challenges facing the dollar
In light of the challenges facing the dollar, the site says that discussions about the future of the global financial system are increasing.
In some emerging markets, countries have already begun issuing debt in their trading partners’ currencies, such as the yuan.
For example, China’s panda bond market recorded record growth in 2023, with foreign entities raising more than $15.3 billion in yuan-denominated bonds, reflecting growing confidence in the Chinese currency.
Alternative payment technologies
Besides strengthening the yuan’s position, China is developing a cross-border payment system (CIPS) and a digital yuan, with the aim of reducing dependence on US-dominated financial systems such as SWIFT.
Despite these efforts, the yuan’s share in world reserves is still small, representing only about 3% compared to the huge share of the dollar.
The future of the digital dollar
The report notes that central bank digital currencies (CBDCs) may reshape the global currency landscape, but the dollar’s dominance remains strong, especially in the world of decentralized finance (DeFi), as 99% of stablecoins are tied to the dollar. These digital currencies are more likely to strengthen the dollar’s position than to weaken it.
The continued dominance of the dollar
The continued dominance of the dollar is due to its high liquidity and abundance, in addition to the geopolitical influence enjoyed by the United States.
The huge US defense budget of $877 billion also contributes to consolidating the dollar’s dominance on the global scene. In addition, American political and military power contributes to strengthening the dollar’s position as the dominant reserve currency in international trade and financial transactions.
The report concludes that despite the remarkable progress of both the euro and the yuan in global trade and finance, the structural and political challenges faced by both currencies indicate that the dominance of the US dollar will remain constant for the foreseeable future.
