Nobel Prize-winning economist Paul Krugman says the U.S. dollar’s dominance “won’t last forever.” While recognizing the global de-dollarization trend, he expressed skepticism about the Chinese yuan’s ability to replace the U.S. dollar as the world’s dominant currency.
Economist Paul Krugman on U.S. Dollar Dominance and Chinese Yuan
Nobel laureate Paul Krugman discussed the U.S. dollar’s dominance and the potential for the Chinese yuan to replace the USD in an opinion piece published in The New York Times earlier this month. Krugman won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2008 for his analysis of trade patterns and location of economic activity.
Krugman acknowledged the growing de-dollarization trend worldwide and the potential decline of the U.S. dollar’s role in international trade, as more countries seek to de-dollarize. However, citing a Federal Reserve report that analyzed various indicators of dollar dominance, he stressed that the U.S. dollar’s dominance has remained steady over the past two decades, adding that “diminution of the dollar’s status seems unlikely in the near term.”
Regarding the decline of the U.S. dollar’s share in central bank reserves, which dropped from 71% in 2000 to 58% in 2022, the Nobel laureate explained: “This decline mainly reflects diversification into smaller currencies such as the Canadian and Australian dollars, rather than a move to serious dollar rivals.”
Noting that many people hold the view that the U.S. is weaponizing its currency through financial sanctions, Krugman further cited the Fed paper, stating:
Just about all prominent reserve currencies are issued by close U.S. allies, who have also participated in sanctions against Russia. As a result, geopolitical adversaries do not have many attractive alternatives to the U.S. dollar.
Krugman also discussed the possibility of the Chinese yuan displacing the U.S. dollar as the world’s dominant currency. While admitting that China is a major economic power, he questioned whether Mandarin will become the dominant language of international commerce or if the yuan will become a major international currency. The Nobel Prize-winning economist believes that it is unlikely that either will become dominant in international commerce in the near future, pointing to factors such as the limited use of Mandarin as a second language and China’s capital controls.
In conclusion, Krugman opined:
The greenback’s dominance won’t last forever, because nothing does. But the hype about de-dollarization is much ado about almost nothing. For now, the dollar dominates because there just aren’t any good alternatives.
One currency that many expect to replace the U.S. dollar is the proposed BRICS currency which could be backed by gold. U.S. Treasury Secretary Janet Yellen, however, doesn’t see the proposed BRICS recurrency as a threat to the USD.
Do you agree with Nobel laureate Paul Krugman about the U.S. dollar dominance and the Chinese yuan? Let us know in the comments section below.