As the global economy continues to absorb geopolitical tensions, we see increasing speculation that the U.S. dollar’s global dominance could wane, with a steady decline in the dollar’s share of central bank reserves and increasing de-dollarization efforts among BRICS nations (Brazil, Russia, India, China and South Africa) and other emerging markets.
Yiannis Giokas is senior director of production innovation at Moody’s Analytics.
While the dollar is likely to remain the dominant reserve currency globally in the near future, domestic and foreign policies could erode its overall dominance. Amid these shifts, U.S. regulated fiat-backed stablecoins may offer a novel counter-narrative that can enhance the dollar’s global power and mitigate the impacts of de-dollarization.
The current global economic landscape is marked by an increased tendency among nations to diversify their reserves away from the U.S. dollar, exacerbated by the Federal Reserve’s rate hikes to tackle domestic inflation. Small, but growing allocations to other major currencies, have reduced the U.S. dollar’s share of central bank holdings to 58% in the last quarter of 2022, from 71% in 2000.
Concurrently, the shadow economy — a sector comprising economic activities that are not officially recorded in a country’s gross domestic product (GDP) due to their illicit nature or the desire to avoid taxes and regulations — continues to be a significant part of many economies. Here, the U.S. dollar often serves as a preferred medium of exchange due to its stability and widespread acceptance.
For example, in countries with high inflation like Turkey and Argentina, with rates of 38.2% and 115.6% (as of June 2023), respectively, residents scramble to convert their income and savings into U.S. dollars for protection. Meanwhile, they face capital controls limiting foreign currency holdings and a central bank-set currency exchange rate that may undervalue their currency by up to 50%, as witnessed with Argentina’s peso.
Consequently, everyday consumers have been utilizing decentralized finance (DeFi), seeking refuge in stablecoins — digital representations of a fiat currency — thus overcoming these economic constraints.
[T]okens could provide an additional tool for maintaining the global financial influence of the U.S….
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