The USD is a global reserve currency. Therefore, while many currencies weaken during times of crisis, the US Dollar not only stays put but grows stronger. This has been happening over and over, so it’s expected that in the coronavirus recession, USD should behave the same way. And it does stand strong at the moment. However, the long-term forecast for this currency isn’t so bright. It’s quite possible that with the rise of digital payments in the pandemic, a crypto reserve currency is in our future.
Is the USD Truly Weakening in the Coronavirus Crisis?
At the moment, the USD is the strongest currency in the world. It’s a simple truth. And this situation won’t change for some time yet, regardless of how the US economy is faring. The reason for this is the fact that the US Dollar is the reserve currency of the world. Therefore, when the volatility of a global recession hit, everyone flocked to the Dollar.
Investors, business owners, and regular everyday people are putting their trust and money into the USD. They are doing it in order to hedge against the difficult economic times ahead. This strategy has worked for many during previous recessions, so why would this one be different?
So far, there is nothing different about the coronavirus recession in regards to the USD situation as a dominating currency. Also, everyone who can, such as expats and global businesses, are capitalizing on it. You can see this from the growing demand in USD transfers. Everyone wants to have some security in these uncertain times, and it seems that the Dollar is it.
All things considered, it should be a stellar time for the American Dollar, right?
Unfortunately, the current crisis is very different from a regular economic recession. It’s not only the coronavirus pandemic that’s affecting the current situation. The US economy is facing pressure from multiple sides and, therefore, the USD is in danger of weakening and collapsing along with it.
For now, its status as the global reserve currency is preventing this from happening. However, this “protection” won’t last forever. And should the USA not recover well from this pandemic, the Dollar might lose its position entirely.
Will the USD Lose Its Position as the Global Reserve Currency?
For all its seeming strength, the USD is in a difficult position at the moment. There is no doubt that it will remain strong for a while. However, once this crisis is over, the world will be changed irrevocably. And one of those changes might be the fall of the US Dollar from the position of global reserve currency.
The main reasons for this possibility are:
- The US economy is weakening fast.
Millions of people have already lost their jobs, and more might follow in the next few months. As such, the economy cannot recover the losses incurred during lockdowns. And the longer it takes to do this, the harder the situation gets.
- Difficult trade relationships with China.
It’s a fact that China’s economy hasn’t been stronger than that of the USA prior to this crisis. It’s not stronger now, as well. But while China is rapidly recovering, the US is facing a threat of a second wave of the pandemic. Once that strikes, the economy will suffer much more. Meanwhile, China is gaining rapidly and could become the greatest global economy soon. Should this happen, the mantle of the world’s reserve currency might fall to the Yuan.
- The need for digital currencies is growing fast.
One factor that can help bring down the USD is that the world is about ready to embrace the use of cryptocurrency. This crisis has led to an unprecedented rise in the use of fintech apps. It jumped up by 72% in a single week at the start of the pandemic. And while digital payments have been growing more popular before, now they’ve become a necessity. It’s reasonable to assume that adopting crypto is the next logical step in the global monetary development.
Can the Next Reserve Currency Be a Cryptocurrency?
Crypto might not have made a breakthrough yet, but it’s been steadily growing in popularity in the last few years. The COVID-19 pandemic has advanced this growth by leaps and bounds. Many financial expert advisors recommend investing in cryptocurrency today.
If nothing else, this will be a good hedging tool for panicking investors.
It’s true that the Bitcoin value dropped dramatically at the beginning of March. This made many people doubt that crypto might become a true hedging tool. However, since then, BTC has already doubled in value. This recovery rate indicates that while Bitcoin isn’t 100% safe, it’s still rather recession-resistant.
Meanwhile, governments the world over are understanding that instead of a luxury, digital payments must become the norm. It’s a healthcare requirement, as well as a logical choice. The increase in the number of digital payments during the lockdown period is proof that people like this method. This means that when the social distancing regulations are lifted, people won’t just go back to using cash.
Should cash payments become obsolete, a digital currency will be a necessity. China’s government seems to understand this clearly. Therefore, the country is reported to be in the process of the development of digital yuan. There is no release date for it yet, but this type of crypto might be exactly what’s necessary.
Nothing changed about the fact that governments are against crypto because they can’t control it in any way. A digital currency that’s tied to the country itself would be a different case. However, now it’s too early to say what will come from this situation in the long-term. But one thing is sure, if there is no digital version of the USD in circulation when other such crypto variations begin to appear, the Dollar will have no chance.
Final Thoughts: What Will the Monetary World Be Like After the Pandemic?
The US Dollar is a very strong currency. There is no denying the fact that even if it does lose its position as a reserve currency, this won’t happen fast. However, the situation we are seeing today makes this future a distinct possibility.
The main problem is that despite the usual strengthening of the currency during a global recession, it’s still weak. Numbers might not reflect this at this moment. But major economic issues plaguing the US are concerning.
The tension in the US-China trade relationship doesn’t help America in any way. In fact, it’s setting the US economy, and therefore currency, in direct competition with China. Sadly, this is a fight that the US might not win. As Chinese businesses are reopening after the virus, America is set to face the second wave.
Should this happen, the US economy, which is already struggling, will be crippled. At that point, the benefits that come from the USD being a global reserve currency won’t be able to sustain it. Therefore, other currencies, such as the Yuan, might push to the top position as the reserve.
However, there is also a chance that this drastic monetary and economic situation will give cryptocurrency the push it needs. The benefits it offers as both a hedging tool and tool for quick global payments are numerous. And the need for easy digital payments is skyrocketing. Crypto has the potential to resolve many issues for many economies. The question is whether governments will take the step of truly adopting digital currencies.
Featured image: Unsplash
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