Global rating agency Fitch downgraded the US government’s top credit rating on Tuesday to AA+ from AAA. Fitch predicted fiscal deterioration over the next three years and repeated down-to-the-wire debt-ceiling negotiations that put at risk the government’s ability to pay its bills.
This is the second major rating agency (after Standard & Poor’s) to strip the US of its triple-A rating, and there are serious, legitimate questions to be asked about the long-term trajectory of the dollar.
Also read: Fitch downgrading US puts Asia’s $3.2 trillion at risk
No one can predict the future, but history unequivocally teaches us that nothing lasts forever. Global reserve currencies have come and gone before. It will happen again.
Indeed, I believe that we are witnessing in real time the world beginning to shift away from a dollar-dominated financial system.
Among other reasons, this is because astronomic levels of debt, and the enormous amount of desperate money-printing to monetize these debts, have caused a considerable drop in the long-term value of the currency.
Earlier this year, I was one of the first voices to flag the threat to the US dollar’s dominance as Russia and Saudi Arabia eye the Chinese yuan for oil trade.
Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars. This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars to do so.
If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for the currency, which would lead to a decrease in the value and dominance of the greenback.
A shift away from dollar influence could have positive implications for Asian economies.
As the world’s most populous and economically diverse region, Asian countries stand to benefit from reduced reliance on the greenback. It would allow greater flexibility in setting their monetary policies.
Currently, many Asian countries, including China, have to take into account the actions of the US Federal Reserve when determining their own interest rates and monetary-policy measures. A reduced dependency on the dollar would enable them to implement policies that are more tailored to their domestic economic conditions, potentially boosting stability and growth.
With the dollar losing its stranglehold, Asian economies would also likely experience a diversification of reserve currencies, paving the way for greater regional trade and investment opportunities.
A multilateral currency system would promote more extensive use of regional currencies like the Japanese yen, Chinese yuan and Indian rupee, making trade within Asia more accessible and efficient. This, in turn, would bolster intra-regional economic cooperation and reduce the risks associated with exposure to a single dominant currency.
Asia has long faced challenges due to the dollar’s fluctuations too, which can adversely impact their trade balances and capital flows. A diminished dollar dominance would lead to more stable exchange rates, reducing volatility and uncertainty in cross-border transactions.
As a result, Asian businesses could plan and invest with greater confidence, leading to enhanced economic growth and stability across the region.
In addition, the dollar’s dominant status has often led Asian economies to accumulate large foreign-exchange reserves, primarily in dollars, as a precautionary measure. However, this practice comes with an opportunity cost, as those reserves could be invested in domestic projects or other currencies with higher returns.
A decline in dollar dominance would encourage Asian countries to diversify their reserve holdings, leading to better allocation of resources and increased investment in productive sectors.
I expect that as the world becomes more interconnected and multipolar, embracing a more diverse and balanced currency system could be an important key to unlocking the full potential of Asia’s dynamic economies.
Nigel Green is founder and CEO of deVere. Follow him on Twitter @nigeljgreen.