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As More Countries Link Arms With China, Is US Dollar Dominance Truly At Risk?

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A growing number of major economies have recently criticized the status of the U.S. dollar as the primary currency for global trade, leaving experts to fear long-term danger for U.S. dollar dominance.

Several countries expressed a strong desire to change the global reserve currency at the Brazil, Russia, India, China and South Africa (BRICS) summit last week, threatening current U.S. dollar dominance. While the global reserve currency is not going to change overnight, the future of the dollar as a global reserve currency could be endangered if U.S. adversaries can coordinate effectively, and the U.S. does not take appropriate action, experts told the Daily Caller News Foundation.

“The US is absolutely in danger of losing global reserve currency status,” E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF. “The threat has increased because the Biden administration has devalued the dollar by an astonishing 16% and also weaponized the dollar abroad.”

If the dollar is replaced as the global reserve currency, experts warn that the U.S. could be faced with hyperinflation as the dollars that are currently being used in the international market come back home, flooding the market. Additionally, the loss of global reserve status would weaken the dollar compared to other countries, decreasing the borrowing power of the U.S. government, which could lead to a need to cut spending.

BRICS will be admitting six new countries—Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates—to its coalition starting Jan. 1, 2024, which could add power to the calls of the other BRICS countries to supplant the U.S. dollar. Following their admission, the coalition will encompass 3.7 billion people.

The U.S. dollar’s share of global foreign exchange reserves reached a 25-year low in the fourth quarter of 2020, accounting for only 59% of global exchanges as opposed to 71% in 1999, when the euro was first launched, according to the International Monetary Fund. The share of the U.S. dollar in global exchanges remains around 59% as of the first quarter of 2023.

“I expect that the portion of reserve assets held in U.S. dollars will continue to decline, but the dollar will still be the dominant currency for the foreseeable future,” Michael Faulkender, chief economist and senior advisor for the Center for American Prosperity, told the DCNF. “In my view, the biggest threat to that is the lack of financial stewardship we have shown recently.”

“Two trillion dollar annual budget deficits as far as the eye can see means that inflation will persist, and that means dollar denominated assets are not the best stores of value,” Faulkender continued. “There are not good alternatives but the more irresponsible Congress continues to be, the faster reserve banks will reduce their preference for dollar assets.”

China has taken concrete steps to rival the U.S. dollar, with Chinese President Xi Jinping urging Gulf Coast nations to conduct oil and gas trades in yuan in December 2022 and the country coming together with Russia to increase the share of Russian exports paid for in yuan from 0.4% before the Russian invasion of Ukraine to 14% in March. South Asian countries, including Malaysia and Indonesia, have also considered dropping the U.S. dollar.

Brazil has been accumulating the Chinese currency, resulting in the country holding more yuan than euros by the end of 2022 while also advocating for a BRICS common currency, according to Business Insider. Argentina announced in April that it would pay for its $790 million worth of monthly imports in yuan.

BRICs just got bigger, with the anti-dollar bloc adding 6 new countries representing 400 million people — the population of South America.

This makes BRICs bigger than the G-7. And it gives them nearly half the world’s oil and mining output — which we’re giving away to appease… pic.twitter.com/Hx9ZYeWPTW

— Peter St Onge, Ph.D. (@profstonge) August 29, 2023

The U.S. has utilized the dollar’s position to sanction rivals, such as a February 2022 move to remove specific Russian banks from the worldwide financial messaging system, SWIFT, used by 11,000 financial institutions around the world. In that same month, the U.S. prohibited American dollar transactions with the Russian central bank and blocked the Russian direct investment fund, limiting Russia’s access to $630 billion in foreign currency reserves, according to CNN.

“By confiscating dollars that rightfully belonged to the Russian central bank and the Russian people, Biden sent a clear message to the rest of the world that the dollar is no longer a gold-standard unit of measurement, but a political weapon,” Antoni told the DCNF.

“De-dollarization will not happen all at once – it occurs slowly at first, then suddenly. When the sudden part arrives, however, it will be 70 years of deficits all pouring home at once,” Antoni told the DCNF. “That’s a hyperinflation scenario, and it’s clear how catastrophic that would be for the American people.”

A probable way that the BRICS countries would dethrone the U.S. dollar would be with their own common currency, which Dr. Thomas Hogan, senior research faculty at the American Institute for Economic Research, believes is unlikely, casting doubt on the BRICS nations’ ability to replace the dollar.

“I think a BRICS common currency is unlikely because it would require the member nations to give up power over their own monetary policies,” Hogan told the DCNF. “The leaders of Russia and China are not known for their willingness to give up power. Even if established, a BRICS currency would be unlikely to rival the US dollar in international trade because no one would trust them not to inflate away the value.”

The White House did not immediately respond to a request to comment from the DCNF.