But it is also true that the dollar is an attractive investment currency. Eighty-eight percent of global foreign exchange market transactions take place in dollars, with only 31 percent in euros and 4 percent in renminbi. The dollar's real effective exchange rate is nearly 3 percent above its 2011 low.
A massive dollar devaluation would not be historical news and there is no reason to write off the dollar as the dominant global reserve currency. However, this time is different and not so easy to characterize. Not only are the economic criteria decisive for the continued existence of a reserve currency, but no less the political position and the hegemonic claim. In addition, a currency's value is always a relative consideration. The changes in the United States must be put in relation to the political and economic dynamics in the European Union (more presicely, the eurozone) on the one hand and in China on the other. The situation here is anything but clear.
An exchange rate as a relative price is ultimately and in the long term an expression of political and economic considerations between two economic areas. Currency competition today is embedded in the newly sparked global power competition. The United States has lang had a double budget deficit and current account deficit. If the United States were a small economy, this would cause massive confidence problems and a continued devaluation of the currency. But as a large nation with hegemonic claims, military power, and diplomatic assertiveness, things look different. This has changed for the United States under President Trump. The strategic alliances of NATO and the transatlantic West in general are dispensed with. The current annual Asia Power Index compiled by the Lowy Institute that measures resources and influence to assess the relative power of states shows that the United States has lost its lead over China, especially due the bad Covid-19 crisis management of Trump.
The European Union got together in the Covid-19 crisis after initial disorganization, and thanks to the Next Generation EU, it did not experience its "Hamiltonian moment" but has taken a big step towards an investment union. In this respect, despite Brexit, which naturally weakens Europe politically and economically, there are new prospects for European integration. If these prospects turn into veritable political approaches, then this would, together with economic modernization – climate, energy, digitalization – as well as a stability-oriented monetary policy, strengthen the chances for the euro as a reserve currency.
China is trying everything to strengthen its global political role and is increasingly formulating hegemonic claims. This is what various projects are about – One Belt, One Road, China 2025, China Standards 2035 – as well as military advances. But China has just as massive problems as it has ambitions, including state terror against the Uyghurs, enormous aging, investment control, high indebtedness of private sector, fragile financial markets, and more, which are increasingly having an impact on foreign policy.
All in all, the relative weights of geopolitics are shifting, but it is not clear how this will turn out and thus whether the different economic arguments for and against the various world currencies would cause a either a substantial depreciation or appreciation. In the medium term, Europe and the euro have a good chance of increasing their importance, while without democratization and fair foreign trade policy, China's chances are less. For the time being, however, the dollar will continue to dominate and there is still no alternative. A return to global responsibility under President Biden will stabilize this arrangement. A dollar crash is not in sight.