Renowned economist and Director of the Center for Sustainable Development at Columbia University, Jeffrey Sachs, recently predicted that the US dollar will gradually decrease in significance as the share of the United States in the global economy diminishes and other currencies gain popularity. Speaking during the latest Annual Columbia China Summit, Sachs noted that up to 60% of foreign trade settlements are currently conducted or denominated in the US dollar, and around half of currency reserves are based on it, but this is set to change.
The Historical Role of the US Dollar
Sachs pointed out that the US share of the global economy is around 15% in purchasing terms, far less than the role of the greenback. He explained that the dominance of the US dollar is “kind of historical” and reflective of the power of the United States in the 20th century. However, with the US using its currency as a political weapon by confiscating foreign exchange reserves of countries like Russia, Venezuela, and Iran, many countries are beginning to move away from it.
Shift Toward Central Bank Digital Currencies
Sachs believes that the future of international payments lies in central bank digital currencies (CBDCs). Currently, the digital yuan (e-CNY), which is the digital version of the renminbi issued by the People’s Bank of China, is undergoing retail-level trials within the country, but Sachs predicts that it will eventually become an international payment system for cross-border settlements. Other countries like Russia, China, Saudi Arabia, India, and South Africa have been exploring alternative payment options to avoid the US dollar-based banking system.
The Declining Role of the US Dollar
According to Sachs, the trend toward alternative payment options is understandable, and it is likely that the role of the US dollar will diminish in the future, while the role of other currencies such as the renminbi, the rupee, the ruble, and digital currencies will increase. Sachs’ observations on the declining role of the US dollar are expected to be of interest to policymakers and investors worldwide.
As the United States’ share of the global economy continues to shrink, and with many countries opting for alternative payment options, the dominance of the US dollar in international payments is expected to decline. Sachs believes that the future of international payments will be dominated by digital currencies, with CBDCs set to play a pivotal role. With policymakers and investors worldwide taking note of these trends, it is clear that the world’s financial landscape is set to undergo significant changes in the coming years.
