Nobel laureate Paul Krugman recently wrote an opinion piece in The New York Times where he discussed the dominance of the U.S. dollar and the possibility of the Chinese yuan replacing it on the international stage. In 2008, Krugman received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for his analysis of trade patterns and the location of economic activity. He acknowledges the growing global trend of de-dollarization, recognizing that more countries are seeking to de-dollarize and that this may potentially lead to a decline in the role of the U.S. dollar in international trade.
Paul Krugman highlighted that as more countries strive to de-dollarize, the role of the U.S. dollar in international trade may potentially decline. 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.”
U.S. Dollar’s Share in Central Bank Reserves
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.”
Krugman pointed out that many people believe the U.S. is weaponizing its currency by using financial sanctions. He further cited the Fed paper, which stated that almost all prominent reserve currencies are issued by close U.S. allies, who have also taken part 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.