On January 6, Gita Gopinath, chief economist of the International Monetary Fund (IMF), shared her opinion about the current and future status of the US dollar. In an interview with the Financial Times, Gopinath said that the currently-hailed global currency remains far from being dethroned by emerging digital currencies.
The chief economist said that she is aware of the growing prominence of digital currencies, particularly in the last few years. However, she stressed that it is not enough to usurp the US dollar from its current post.
Gopinath further admitted that innovations in the payment industry have indeed lessened the costs associated with making payments. However, she countered that the development is not even close to breaking the immemorial and widely-held perceptions of the people about the stability and safety of the global currency. The level of acceptance for the US dollar has kept it dominant for decades, the chief economy explained.
Factors that make the US dollar superior
Gopinath said in her piece that digital currencies present intriguing possibilities and potentials. However, she said that replacing the US dollar is improbable due to several reasons.
First, digital currencies lack global acceptance and infrastructure. While there are leading political and economic figures that support the idea of replacing the US dollar, Gopinath noted that they first need to prove that credible investor protection backs these digital currencies. She also emphasized that, in contrast, the US dollar is bolstered by an established rule of law. Moreover, it is supported by institutions that have been dealing with the international monetary system since time immemorial.
The chief economist also said that digital currencies are comparable to the Euro, the second largest currency in the basket comprised of global reserves. She noted that the currency has more than what it takes to address fundamental issues within the international financial system. However, until today, Euro has never been able to outperform the US dollar in all aspects.
It’s worth noting that Mark Carney, the outgoing governor of the central bank of England, had proposed to create a central bank digital currency (CBDC). Dubbed “synthetic hegemonic currency”, it would be pegged to a basket of reserve currencies. Carney claims that national economies would reap significant benefits, particularly during this time of globalization.
Gopinath sees the argument and agrees that the proposed currency could potentially rebalance global trade. However, once again, she argued that it has to be first accepted on a worldwide scale.
As of the latest data from the IMF, over $100 billion had been added to the supply of the US dollar last year. Notably, the US dollar in the global foreign exchange reserves accounted for 60% in the third quarter of 2019, a far cry from Euro’s 20%.