It’s telling that China has been a big buyer of gold recently, as a hedge against the value of its dollar holdings. It is also testing its own digital currency regime, the e-RMB, becoming the first sovereign nation to roll out a central bank-backed cryptocurrency. One can imagine that would be easy to deploy throughout the orbit of China’s Belt and Road Initiative, as an attractive alternative for countries and businesses that want to trade with one another without having to use dollars to hedge exchange-rate risk.
This alone should not pose a challenge to the supremacy of the greenback, although it was enough to prompt former US Treasury secretary Hank Paulson, a man who does not comment lightly, to write a recent essay surveying the future of the dollar. But it isn’t happening in a vacuum.
The European Commission’s plan to bolster its recovery budget for Covid-19 bailouts by issuing debt that will be repaid by EU-wide taxes could become the basis of a true fiscal union and, ultimately, a United States of Europe. If it does, then I can imagine a lot more people might want to hold more euros.
I can also imagine a continued weakening of ties between the US and Saudi Arabia, which might in turn undermine the dollar. Among the many reasons for central banks and global investors to hold US dollars, a key one is that oil is priced in dollars. Continuing Saudi actions to undermine US shale put a rift in the relationship between the administration of US president Donald Trump and Riyadh. It is unlikely that a future President Biden, who would probably follow Barack Obama’s pro-Iran stance, would repair it.