As China’s financial system changes and its digital currency begins to take shape, countries across the globe are looking to follow a similar path.
This number includes the US, with the Federal Reserve planning to launch a full investigation into the potential impact of a digital version of the US dollar. This is a significant development, especially with the greenback established as the world’s benchmark currency and the most widely used reserve currency.
But why is the dollar such a seminal and important currency, and how will a digital greenback impact the world’s forex markets?
Why is the US Dollar So Dominant?
According to the International Monetary Fund (IMF), the US dollar is the most popular and widely used currency in the world, comprising more than 60% of all known central bank foreign exchange reserves.
It’s this fact that has established the asset as a de facto global currency, even though this remains an unofficial and hard to quantify status.
But why is the greenback such a dominant currency? In simple terms, the influence and widespread appeal of the dollar is underpinned by the relative strength of the US economy, which for now remains the largest in the world and boasts a total GDP of $20.4 trillion.
On a fundamental level, almost 40% of the world’s cumulative debt is issued in dollars, which means that foreign banks are required to hold significant amounts of this currency in order to conduct business on a daily basis. This has been the case ever since the great recession of 2008, when non-American banks held $27 trillion in international liabilities (of which $18 trillion was made up of US dollars).
The US dollar has also been an important and seminal currency historically, particularly from the perspective of setting global exchange rates.
In fact, it played a pivotal role in both the so-called “Gold Standard” and the Bretton Woods System, with many currencies having been unofficially pegged to the greenback through history.
How Would a Digital Dollar Impact the Global Forex Market?
The US dollar also plays a seminal role in the global forex market, with the greenback currently on one side of around 88% of all currency trades.
But how would a digital dollar iteration affect the global forex markets and Oanda trading users? In short, this would be beneficial for the greenback, and potentially help to preserve the status of the USD as the world’s primary reserve currency.
The reason for this is simple; as China’s switch to a digital yuan affords them a huge advantage in the global financial sphere, with the country holding more than 120 patents on cutting-edge blockchain technology at present.
Similarly, it’s the first country to successfully develop a central bank-banked digital currency, creating a first-to-market advantage that will be hard to overcome.
So, the rollout of a US alternative will undoubtedly help to maintain the status quo in the forex market, which is good news for established traders and those with existing knowledge.