More support for the U.S. dollar losing its status as the primary reserve currency for the world is coming to the surface. This time, from the number one ally to the U.S., the U.K. The governor for the Bank of England, Mark Carney, believes that the dollar will lose its place as the global reserve currency and adds that digital currency could take its place.
The British pound was the foundation of international money markets until approximately a century ago when the dollar started to gain strength. However, it has now reached a dominant position that makes it a hindrance to sustainable growth. He suggests that a new digital currency that is offered by a conglomeration of nations would help to unfreeze dollar funds that the nations currently stockpile as a type of insurance policy to be able to overcome extreme economic downtimes.
Speaking during a meeting of central bankers held in Wyoming recently, Carney explained that a digital currency “could dampen the domineering influence of the U.S. dollar on global trade. If the share of trade invoiced in [a digital currency] were to rise, shocks in the U.S. would have less potent spillovers through exchange rates, and trade would become less synchronised across countries.
He added, “The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollar’s dominance in credit markets. By reducing the influence of the U.S. on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.”
One possible solution, according to Carney, is Facebook’s Libra. The U.K., in contrast to many countries, has been supportive of the project, but even Carney recognizes that there are concerns. He explains, “The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch.”
Another possibility is China’s planned central bank digital currency. While only operating on the fringes of what makes a coin a digital currency, it was created in response to the Libra and might be introduced years before Mark Zuckerberg receives approval for his project. Carney adds, “By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing [a Synthetic Hegemonic Currency].”
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