Decline of the US Dollar: The Rise of a Bipolar Global Reserve Currency"

The US dollar has been the dominant global reserve currency since the creation of the Bretton Woods system after World War II. Despite fluctuations in exchange rates in the early 1970s, the greenback has maintained its "exorbitant privilege." However, with the growing weaponization of the dollar for national security purposes and increasing geopolitical competition between the West and revisionist powers such as China, Russia, Iran, and North Korea, some believe that the process of de-dollarization will accelerate.

This trend is also being driven by the emergence of central bank digital currencies, which could lead to an alternative multipolar currency and international payment regime. While skeptics argue that the global share of the US dollar as a unit of account, means of payment, and store of value has not fallen much, they overlook the economies of scale and network that lead to a relative monopoly in reserve currency status.

A reserve currency country must also accept permanent current account deficits to issue enough of the liabilities held by non-residents. Critics also question whether a country with a persistent current account surplus can ever achieve global reserve status. However, China's recent transaction with Saudi Arabia in renminbi, along with the Triffin dilemma in a currency regime in which the reserve country runs permanent current account deficits, suggests that the relative decline of the US dollar as the main reserve currency is likely to occur over the next decade.

In a world increasingly divided into two geopolitical spheres of influence, a bipolar, rather than a multipolar, currency regime will replace the unipolar one. New technologies including CBDCs, payment systems, swap lines, and alternatives to Swift will also hasten this transition. The intensifying contest between the US and China will inevitably be felt in this new bipolar global reserve currency regime.