Global Public Investor 2020: Evolving currency system

Central bank digital currencies unlikely to dethrone the dollar

IN mid-March, at the height of the pandemic’s impact on global finance, markets were playing a familiar tune. Sharp dollar appreciation, a blow-out in cross-currency bases and outflows from major emerging markets appeared in much the same way as during the 2008 financial crisis, though at a much faster pace and on an unprecedented scale. According to University of Cambridge economists Giancarlo Corsetti and Emile Marin, by some estimates, outflows from emerging markets in March were ‘double the peak weekly outflows seen around the 2013 US taper tantrum’. From the perspective of the international monetary system, the dominant theme of the decade between the 2008 financial crisis and the pandemic has been an entrenchment of the centrality of the dollar to the global economy, in part explaining the greater than ever flight-to-dollar-safety witnessed in March. The dollar’s share of global reserves has stayed roughly constant at 63% since 2008 (Figure 1 on p.38). Major challengers, such as the euro or the renminbi, have failed to appeal to international investors. Despite doubts over US leadership and a fairly tepid economic recovery, the greenback’s place at the pinnacle of the reserve currency system remains unchallenged.

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