According to economist Stephen Jen, the US dollar has long held the role of the world’s principal reserve currency, but this is changing rapidly. Factors such as growing skepticism about US fiscal policy, the rise of alternative currencies, and concerns about the US government’s debt levels all contribute to this fall. As a result, countries such as Russia and China are lowering their dollar-denominated holdings and diversifying their reserves with other assets, indicating the global shift away from the dollar as the principal reserve currency.
Jen thinks that a “tripolar” reserve currency structure, with the Chinese yuan and the EU euro achieving equal prominence alongside the US dollar, is on the horizon. This move has far-reaching implications for the global financial system, potentially affecting trade, investments, and geopolitics. As countries and central banks diversify their currency holdings, the risks associated with over-dependence on one currency may be reduced.
For some years, the euro has been considered a candidate for reserve currency status. Its advantages include the European Union’s economic might, the legitimacy of the European Central Bank, and its broad use for trade and financial operations. As the US dollar loses its supremacy, the euro promises to profit from growing demand and usage.
For the yuan to become a reserve currency, China’s financial system must improve in quality. Despite obstacles, China’s economic clout and government initiatives may pave the way for the yuan’s rise. The Chinese government has actively promoted the internationalization of the yuan, arranging currency swap arrangements with a number of nations, including major economies such as the United Kingdom, Brazil, and South Korea. In addition, China’s grandiose Belt and Road Initiative intends to promote economic cooperation and infrastructural development throughout Asia, Europe, and Africa.
China’s Digital Currency Electronic Payment (DCEP) system has the potential to transform yuan internationalization. China intends to increase the usage of the digital yuan through trial initiatives in many cities. China’s early deployment of central bank digital currencies (CBDCs) may provide a competitive advantage in the future of digital banking as countries investigate them.
A world with three reserve currencies, the US dollar, the euro, and the yuan, would usher in a new age of currency competition. This transition will have far-reaching implications for the global financial system, prompting a rethinking of financial relationships and policies. Trade and investment patterns may also evolve as countries increasingly use the euro and the yuan in transactions, resulting in a realignment of global economic alliances.
Finally, the establishment of a world with three reserve currencies would represent a profound shift in the global financial system. While the yuan faces challenges as a reserve currency, China’s push for internationalization and the digital yuan may eventually tip the scales in its favor.