The U.S. dollar's position as the world's currency of choice could be about to come under unprecedented pressure due to twin challenges from China and Russia, an influential Credit Suisse analyst has warned.
Cryptocurrency-inspired technological advances in the form of central bank digital currencies (CBDCs) and growing efforts to end dependency on the U.S. dollar means its "exorbitant privilege" as the international reserve currency "could be under assault," Credit Suisse's Zoltan Pozar wrote in a Financial Times op-ed.
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"The emerging, CBDC-based network—enforced with bilateral currency swap lines—could enable central banks in the global east and south to serve as foreign exchange dealers to intermediate currency flows between local banking systems, all without referencing the dollar or touching the western banking system," Pozar wrote.
CBDCs—popularized by Facebook's failed attempts to create its own private digital currency beginning in 2019—are being explored by central banks around the world, with China already launching a digital yuan, sometimes called the eCNY.
Russia has meanwhile reportedly begun developing a cross-border settlement system using a digit ruble as a result of international sanctions following its invasion of Ukraine.
"A new network was needed," Pozar wrote, with "the pace of de-dollarisation" appearing to have picked up and CBDCs potentially "accelerating this transition" as countries increasingly pay for energy and commodities with alternatives to the U.S. dollar.
"If less trade is invoiced in U.S. dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the 'exorbitant privilege' that the dollar holds as the international reserve currency could be under assault," according to Pozar.
The U.S. has begun exploring the possibility of a Federal Reserve-issued digital dollar but a top Treasury official last year played down both the need for a digital dollar as well as the threat to the dollar's role in international commerce or as a reserve currency.
"My view is our global leadership doesn’t come from our technology," Nellie Liang, undersecretary for domestic finance at the Treasury, told Bloomberg in December. "It comes from our governance system, the rules that govern our financial markets, our rule of law and the safety and soundness of our institutions."
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