Renowned economist Nouriel Roubini, who accurately predicted the global financial crisis of 2008, said in an article in the Financial Times on Sunday that the US dollar’s status as the main reserve currency of the world is now in jeopardy.
Roubini noted that the US currency is quickly losing competitive advantage to the yuan, however he stressed that at present no other currency is at this point capable of replacing the dollar for international trade altogether.
Nicknamed “Dr Doom,” for his dour predictions, Roubini said, “Given the increased weaponization of the dollar for national security purposes, and the growing geopolitical rivalry between the west and revisionist powers such as China, Russia, Iran and North Korea, some argue that de-dollarization will accelerate…In a world that will be increasingly divided into two geopolitical spheres of influence – namely those surrounding the US and China – it is likely that a bipolar…currency regime will eventually replace the unipolar one.”
Skeptics were quick to point out the yuan still had several impediments to becoming a reserve currency, among them Beijing’s capital controls, its present refusal to accept account deficits, and the less flexible exchange rate of the yuan.
However Roubini argued that all of those detriments were becoming less important as Washington has begun to weaponize the dollar, as well as access to the financial system required to utilize it, through the regular imposition of sanctions on nations which politically displease Washington.
Roubini argued, “Complete exchange rate flexibility and international capital mobility is not necessary in order for a country to achieve reserve currency status…And while China may have capital controls, the US has its own version that may reduce the appeal of dollar assets among foes and relative friends. These include financial sanctions against its rivals, restrictions to inward investment in many national security-sensitive sectors and firms, and even secondary sanctions against friends who violate the primary ones.”
Roubini also pointed out that Beijing has been increasing the numbers of yuan transactions with foreign trading partners, a trend which is likely to expand as political tensions with Washington grow. He also noted how emerging market economies preferred “the ability to trade oil in [yuan] and to hold a greater share of their reserves in the Chinese currency… given that they do a great deal more trade with China than the US.”
In addition the economist pointed to newer technologies which are emerging, such as CBDCs, payment systems similar to Alipay, as well as swap lines between China and its trade partners and national analogs of the SWIFT system being developed, all of which “will hasten the advent of a bipolar global monetary and financial system.”
Roubini concluded, “For all these reasons, the relative decline of the US dollar as the main reserve currency is likely to occur over the next decade. The intensifying geopolitical contest between Washington and Beijing will inevitably be felt in a bipolar global reserve currency regime as well.”
Image of Nouriel Roubini courtesy of Nouriel Roubini – World Economic Forum Annual Meeting 2012
