The dominant role of the US dollar in global markets should continue, but the rapid rise in cryptocurrencies may threaten this situation, according to for research paper New released by the Federal Reserve.
Digital currencies, such as Bitcoin, as well as government-backed currencies, may reduce dependence on the US dollar, Fed economists Carol Bertout, Bastian von Beschwitz and Stephanie Corcoru wrote in their paper called The International Role of the US Dollar.
They point to changing consumer and investor preferences while new products can change the balance of perceived costs and benefits.
It is unlikely that technology alone can change the landscape enough to offset the long-term causes of the dollar’s dominance.
The research paper comes as the Federal Reserve is expected soon to publish a separate and highly anticipated report on whether the United States should issue a central bank digital currency.
But key Federal Reserve officials are at odds. While Fed Chair Jerome Powell has expressed some openness toward central bank digital currencies, other Fed officials, such as Vice President Randall Quarles, have been more skeptical.
AndHe said Quarles in July that while public interest in the digital dollar is at its peak, the US dollar is highly digital, serving the nation and the economy well.
In addition to digital currencies. The research paper from federal economists highlighted two other challenges in the near term that may affect the international situation of the US dollar.
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The rapid rise of cryptocurrencies threatens the dominance of the dollar
The first, they said, is the continued integration of Europe, a large economy with strong institutions and free trade. Economists in particular pointed to the European Union’s decision to issue jointly backed debt during the height of the pandemic.
They added: If financial integration progresses and a large and liquid market for EU bonds develops, the euro could become more attractive as a reserve currency. This integration can be accelerated through improvements to the infrastructure of the European Union’s sovereign debt market and the introduction of the digital euro.
The other potential risk, economists said, is the accelerated growth of China. It is a country whose GDP is expected to exceed that of the US in nominal terms by 2023.
However, they are optimistic that the US dollar remains attractive. They added: The dollar is likely to remain the world’s dominant global currency for the foreseeable future. In the absence of any large-scale political or economic changes that would harm the value of the US dollar as a store of value or as a medium of exchange.
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