Is The Reign of the Us Dollar Coming to an End?

Abstract

The ascent to prominence of the US dollar was and still is supported by the US’s unmatched economic, financial, military and political position which allowed the dollar to fulfill all of the six required functions of a key currency in an unsurpassed way. The upsetting defect in the current dollar-based international monetary system is that the US is running increasing current account and budget deficits, high international debt levels and a significant decline in its net international investment position. These threaten the key currency status of the dollar. Although the dollar is set to maintain its dominant position and its accompanying benefits to the US over the short run, over the long run the dollar inevitably will have to make room for another ascending currency(ies) in view of the decline in the US’s international stature. This, however, contains the potential for serious financial instability, particularly during the transition period.