Two rivals increase their "show" of strength, but the USD's position remains "as solid as a rock", why is that?

In recent years, the EUR and the Chinese Yuan (CNY) have emerged as potential rivals to the USD's dominance.

The USD will continue to firmly hold the leading position despite the growing presence of the EUR and the RMB. (Graphic: Global Times)

The US dollar has long held the position of the world’s dominant currency. This is largely due to the enormous size and stability of the US economy and the unparalleled liquidity of its financial markets. These factors have reinforced the dollar’s ​​dominance in international trade and finance, with the US economy valued at over $25 trillion.

Two rivals of USD

However, in recent years, two other currencies, the EUR and the CNY, have emerged as potential rivals to the USD's dominance.

The EUR – backed by the strong institutional framework of the Eurozone – offers political stability and strong monetary power. These characteristics make the EUR an attractive candidate for the position of global reserve currency.

However, the structural and political fragmentation of the European Union (EU) and the diverging fiscal policies among member states have undermined the credibility of the EUR as a global reserve asset.

As of 2023, the euro will account for just 21% of global foreign exchange reserves, compared to 58% for the dollar. Even with the issuance of 400 billion euros (over $447 billion) in jointly guaranteed bonds during the Covid-19 crisis, the eurozone still lacks the deep and liquid debt markets needed to boost the euro’s status as a reserve currency.

On China's side, rapid economic growth and an expanding role in global trade have significantly boosted the RMB's global standing.

According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in 2023, RMB accounted for 3.71% of global payments value. RMB's share of trade finance payments doubled from 4% in 2022 to 8% in 2024.

These advances, fueled by the world's second-largest economic power, have positioned the yuan as a potential global reserve currency.

But there is no denying that the RMB still faces significant obstacles that prevent other countries from using it as a reserve currency, including strict capital controls.

NDT "dominates the airwaves", unintentionally strengthening the role of USD

Recent discussions have highlighted potential changes that could impact demand for USD alternatives.

For example, emerging markets could start issuing more debt in the currencies of trading partners, like China.

Last year, China’s Panda bond market saw record growth as foreign issuers raised more than $15.3 billion in yuan-denominated bonds, up from $12.4 billion in 2022. The strong growth signals growing confidence in the yuan as a funding currency, potentially boosting its status as a reserve currency.

At the same time, the world's second largest economy has also made many efforts to promote its domestic currency to become a global currency.

Typical examples include the establishment of the Cross-Border Interbank Payment System (CIPS) in 2015 and the development of the digital yuan (e-CNY).

These initiatives aim to reduce dependence on US-dominated financial systems such as SWIFT and increase the global reach of the yuan.

Last year, China’s Panda bond market saw record growth as foreign issuers raised more than $15.3 billion in yuan-denominated bonds. (Source: Medium)

However, with the above efforts, the proportion of the NDT in global reserves is still very small, only 3% compared to 58% of the USD.

Furthermore, the introduction of central bank digital currencies (CBDCs) could reshape the global monetary landscape.

The dominance of the USD in DeFi (decentralized finance) trading, where 99% of stablecoins (cryptocurrencies pegged to a stable asset) are pegged to the USD, shows that the expansion of any digital currency is likely to strengthen the role of the USD.

Solid USD

The USD will continue to hold a strong lead despite the growing presence of the EUR and the CNY.

The greenback's stability and liquidity, combined with America's geopolitical clout - backed by its $877 billion military budget - have ensured the USD's continued dominance.

Meanwhile, the EUR faces significant hurdles due to the EU’s political fragmentation and divergent fiscal policies among its member states, which undermine its credibility as a global reserve currency, despite its relatively large share of global reserves.

Geopolitical factors also play an important role in maintaining the dominance of the USD.

The USD’s position is reinforced by the political and military supremacy of the world’s largest economy, as well as its unparalleled sanctioning power. Countries that rely on the currency for international trade and financial transactions are more likely to align their policies with US interests, further cementing the USD’s central role in the global financial system.

While the Euro and the Yuan have made significant strides in global trade and finance, they are still far from being credible alternatives to the status of the world’s primary reserve currency. The structural and political challenges facing both currencies suggest that the USD will continue to dominate for the foreseeable future.

Source: https://baoquocte.vn/hai-doi-thu-tang-cuong-pho-suc-manh-vi-the-usd-van-vung-nhu-thach-ban-vi-sao-vay-290286.html