Private digital currencies, such as bitcoin and ether, as well as government-backed ones, may reduce reliance on the US dollar, Fed economists Carol Bertaut, Bastian von Beschwitz, and Stephanie Curcuru, wrote in their paper, “The International Role of the US Dollar.”
They cited changing consumer and investor preferences while new products could shift the balance of perceived costs and benefits.
“That said, it is unlikely that technology alone could alter the landscape enough to completely offset the long-standing reasons the dollar has been dominant,” the paper added.
The research paper comes as the Fed is expected to publish soon a separate, highly anticipated report on whether the US should issue central bank digital currency.
But key Fed officials are at odds. While Fed Chair Jerome Powell has expressed some openness towards CBDCs, other Fed officials, such as Vice Chair Randal Quarles, have been more skeptical.
Quarles in July said while public interest in a digital dollar has reached “fever pitch,” the US dollar is already highly digitized, an arrangement he said, “serves the nation and the economy well.”
In addition to digital currencies, the research paper from the Fed economists highlighted two other near-term challenges may affect the US dollar’s international status.
One is the continuing integration of Europe, a large economy with robust institutions and free trade, they said. In particular, the economists pointed to the European Union’s decision to issue a jointly-backed debt during the height of the pandemic.
“If fiscal integration progresses and a large, liquid market for EU bonds develops, the euro could become more attractive as a reserve currency,” they said. “This integration could potentially be accelerated by enhancements to the EU’s sovereign debt market infrastructure and introducing a digital euro.”
Another possible risk is the accelerating growth of China, a nation whose GDP is expected to exceed the US’s in nominal terms by 2023, the economists said.
Nevertheless, they are bullish the US dollar will remain attractive.
“Absent any large-scale political or economic changes which damage the value of the US dollar as a store of value or medium of exchange … the dollar will likely remain the world’s dominant international currency for the foreseeable future,” they added.
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